1. Arrow up or down: When a gasoline tax is offset by an income-tax cut that makes...

Question:

1. Arrow up or down: When a gasoline tax is offset by an income-tax cut that makes a consumer s original choice just affordable, gasoline consumption will _____because the tax _____the bang per buck of gasoline.
2. An individual demand curve shows the relationship between _____and _____, ceteris paribus.
3. Arrow up or down: The income effect of a price change is that a decrease in price _____a consumer s real income and _____the consumption of a normal good.
4. Arrow up or down: The substitution effect is that a decrease in the price of movies _____the relative price of movies and _____the consumption of movies.
5. To show the substitution effect of a decrease in price, we _____ (increase/decrease) a consumer s nominal income so the consumer can just afford _____.
6. Suppose Maxine initially watches four movies at a price of $3 each and buys 18 books at a price of $1 each, and then the price of movies increases to $5. To make Maxine s original bundle just affordable, her income must increase to $ _____. Her utility maximizing consumption of movies will because at the original bundle, _____is now greater than _____.
7. Suppose Biff s parents adjust their monthly payment to offset any change in price, ensuring that the bundle of goods Biff chose the previous month is just affordable. Suppose the price of movies changes. The change in the parental payment equals _____ time€™s _____. If the price of movies decreases and his parents adjust the payment, Biff will buy _____ (more/fewer) movies because of the _____effect.
8. Response to the Gas Tax. Petrov earns $10,000 in pretax income and initially pays $2,200 in income taxes and consumes 600 gallons of gasoline per year (at a price of $3 per gallon) and spends $6,000 on another good (at a price of $1 per unit). At the initial bundle of gas and the other good, the marginal utility of gas is 30 utils and the marginal utility of the other good is 10 utils.
a. Draw a complete graph showing Petrov s initial (before the gas tax) budget line and his initial choice. At his initial choice, the marginal utility per dollar on gasoline is _____utils.
b. Suppose the government imposes a new gasoline tax of $2 per gallon, and assume that the gas tax increases the price of gas to $5. To make his initial bundle of gasoline and other goods affordable after the $2 gas tax, Petrov s income tax must decrease by _____.
c. After the tax changes, at his initial bundle the bang per buck of gasoline is _____, compared to a bang per buck of _____for the other good.
9. Another Point on the Demand Curve. Suppose the price of movies decreases from $3 to $2. Maxine s income is $30, and the price of books is $1. Fill in the blanks in the following table. Then draw the budget

Line and find the utility-maximizing combination of movies and books.
10. Shipping the Good Apples Out? Suppose apples come in two quality levels, low and high. At a store in the apple-growing region, the price of low-quality apples is $1 per pound, and the price of high-quality apples is $4 per pound. Johnny lives in the apple growing region and buys eight pounds of each type. His marginal utility of apples is 3 utils for low-quality apples and 12 utils for high-quality apples.
a. Is Johnny maximizing his utility?
b. Suppose Johnny moves to an area outside the apple-growing region. Shipping the apples to his new area adds $2 to the price of a pound of apples, for both low- and high-quality apples. To simplify matters, assume Johnny s income increases by an amount large enough to fully offset the higher prices of apples. In other words, he can still afford the original bundle of eight pounds of each type of apples. If he continues to buy eight pounds of apples of each type, is he maximizing his utility? If not, how should he change his mix of high- and low-quality apples?
c. What are the implications for the mix of high- and low-quality apples in apple-growing areas and other regions? Where will most of the high-quality apples besold?