Petrov initially pays $2,200 in income taxes and consumes 600 gallons of gasoline per year at a

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Petrov initially pays $2,200 in income taxes and consumes 600 gallons of gasoline per year at a price of $3 per gallon. The price of the other good is $1. For Petrov’s initial product bundle, the marginal utility of gas is 30 utils and the marginal utility of the other good is 10 utils. 

a. For his initial bundle, the marginal utility per dollar on gasoline is ________ utils.

b. Suppose the government imposes a new gasoline tax that increases the price of gas to $5. To make his initial consumer bundle just affordable, Petrov’s income must ________ (increase/decrease) by ________.

c. Suppose the government cuts Petrov’s income tax by the amount computed in (b). Given the new gas tax and the income tax cut, at his initial bundle, the marginal utility per dollar of gasoline is ________ utils, compared to ________ for the other good. To satisfy the marginal principle, Petrov will ________ (increase/decrease) his gasoline consumption.

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Microeconomics Principles Applications And Tools

ISBN: 9780134078878

9th Edition

Authors: Arthur O'Sullivan, Steven Sheffrin, Stephen Perez

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