Suppose a consumer has a utility function u(x1,x2) = log(x1)+log(x2) and an income of y =...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Suppose a consumer has a utility function u(x1,x2) = log(x1)+log(x2) and an income of y = 100 and the prices of the two goods are p = 2 and p2 = 3. a. In a world with no sales or income taxes, tell me how much of goods x1 and x2 this consumer will purchase. b. Now suppose there is a 10% a sales tax on good 1. That is, for every unit of good 1 the person buys, he/she has to pay a price of pi(1+.1) = 2.2, where the 10% of the price, or 20 cents, goes to the government as sales tax. How much of goods 1 and 2 does this person buy now? c. Suppose instead there is a 5% income tax, so that the consumer must pay 5% of his/her income to the government. If there is no sales tax but a 5% income tax, how much of goods 1 and 2 will the consumer consume? d. Which would the consumer prefer, a 10% sales tax on good 1, or a 5% income tax? Explain your reasoning for full credit. e. How big would the sales tax on good 1 have to be for the government to get the same revenue as a 5% income tax? Which of the two taxes would the consumer prefer in this case, or is the consumer indifferent because the consumer has to pay a total tax of $5 (5% of $100) in either case? Suppose a consumer has a utility function u(x1,x2) = log(x1)+log(x2) and an income of y = 100 and the prices of the two goods are p = 2 and p2 = 3. a. In a world with no sales or income taxes, tell me how much of goods x1 and x2 this consumer will purchase. b. Now suppose there is a 10% a sales tax on good 1. That is, for every unit of good 1 the person buys, he/she has to pay a price of pi(1+.1) = 2.2, where the 10% of the price, or 20 cents, goes to the government as sales tax. How much of goods 1 and 2 does this person buy now? c. Suppose instead there is a 5% income tax, so that the consumer must pay 5% of his/her income to the government. If there is no sales tax but a 5% income tax, how much of goods 1 and 2 will the consumer consume? d. Which would the consumer prefer, a 10% sales tax on good 1, or a 5% income tax? Explain your reasoning for full credit. e. How big would the sales tax on good 1 have to be for the government to get the same revenue as a 5% income tax? Which of the two taxes would the consumer prefer in this case, or is the consumer indifferent because the consumer has to pay a total tax of $5 (5% of $100) in either case?
Expert Answer:
Related Book For
Making Hard Decisions with decision tools
ISBN: 978-0538797573
3rd edition
Authors: Robert Clemen, Terence Reilly
Posted Date:
Students also viewed these finance questions
-
Suppose a consumer has preferences over two goods that can be represented by the quasi-linear utility function U(x, y) = 2x + y. The marginal utilities are MUx = 1/x and MUy = 1. a) Is the assumption...
-
An individual has the following utility function: u(w) = w.5 where w = wealth. a. Using expected utility, order the following prospects in terms of preference, from the most to the least preferred:...
-
3. Suppose a consumer has the utility function U(q2, q,) = In(q)+ 2qy. Let price of good x be Pa, the price of good y be P, and income be Y. (a) (4 marks) Find the Engel Curve of good r and good y....
-
Lauren Smith was relaxing after work with a colleague at a local bar. After a few drinks, she began expressing her feelings about her company's new control initiatives. It seems that as a result of...
-
Ken Young and Kim Sherwood organized Reader Direct as a corporation; each contributed $ 49,000 cash to start the business and received 4,000 shares of stock. The store completed its first year of...
-
Statement of profit or loss and other comprehensive income and note for income The ledger of Pine Valley Ltd at 30 June 2025 contained the following information. Required (a) Prepare a statement of...
-
Use the data in Exercise 24 in Section 13.1 for the following. a. Compute a point estimate for the mean auditory response time for subjects with a visual response time of 200. b. Construct a 99%...
-
The manager at a water park constructed the following frequency distribution to summarize attendance in July andAugust. Attendance ..... Frequency 1,000 up to 1,250 .... 5 1,250 up to 1,500 .... 6...
-
Discuss the implementation of advanced transportation infrastructure technologies, such as smart traffic signal systems, dynamic lane management strategies, and adaptive traffic control algorithms,...
-
A hollow circular post ABC (see figure) supports a load P1 = 1700 lb acting at the top. A second load P2 is uniformly distributed around the cap plate at B. The diameters and thicknesses of the upper...
-
(6%) Problem 10: When heating water for cooking food, it is common to use an electric or natural-gas cooktop. A metal pot with radius r = 0.14 m is filled with water to a depth of h = 0.19 m and...
-
What factors influence forward rates implied from the yield curve other than the markets expectations of future interest rates?
-
Define a data record.
-
Explain why the quoted yield on a bank discount basis for a U.S. Treasury bill is not directly comparable to a coupon Treasurys yield?
-
Does interest accrue for a Treasury note or bond accrue at the same rate every semiannual coupon period?
-
Define joint costs, split-off point and further processing costs.
-
Realism, Naturalism & Regionalism (1865-1914) As America suffered from growing pains, this movement was marked by feelings of disillusionment. Familiar subjects included ghettos of rapidly growing...
-
Write out the formula for the total costs of carrying and ordering inventory, and then use the formula to derive the EOQ model. Andria Mullins, financial manager of Webster Electronics, has been...
-
If the number of chocolate chips in a chocolate-chip cookie follows a Poisson where the average is 3.6 chocolate chips per cookie, what is the probability of finding no chocolate chips in a given...
-
Susan Cooper currently works as an assistant manager at Joes Coffee and Tea, a national chain of over 200 coffee shops. Susan has worked at Joes for 4 years. Feeling that her career was stalling, she...
-
The clarity test is an important issue in Exercise 3.11. The weather obviously can be somewhere between full sunshine and rain. Should you include an outcome like cloudy? Would it affect your...
-
In the Hochfelder case all of the following were factors in the case except a. The Securities Exchange Act of 1934. Data From Exchange Act 1934 When the Securities Act was passed, the Interstate...
-
Refer to the example of an auditors report issued in 1915. List the differences between the report styles in 1915 and today (refer to Chapter 1). Indicate in what ways this report would be deficient...
-
What client actions might cause a CPA to terminate an existing client relationship?
Study smarter with the SolutionInn App