1. Set up a utility maximization model to think about the consumption of gasoline and other goods. Assume a utility function U = u(C, G) where G is the consumption of gasoline and C is the consumption of a composite good. a) g) h) The budget constraint of a representative consumer with annual income I and the price of gasoline PG can be written as C + PGG = I . Draw the budget constraint on coordinates where y-axis is C and xaxis is G. What is the slope of the budget line? On the graph, use a difference curve to illustrate the optimal choice of the consumer. Assume that the government imposes an exercise tax t on the consumption of gasoline, e.g. t = 10%. The budget constraint becomes C + (1 + t)PGG = 1. Draw the new budget constraint on the coordinates. How does the slope of the budget line change? On the graph, illustrate the optimal choice of the consumer after the tax is imposed. On the graph, decompose the change in the optimal choice into the income and substitution effects. How does the tax affect the purchasing power of the consumer? Does the consumer want to consumer more or less due to the income effect? Assume the annual income of the consumer is $40,000, the price of gasoline is $3 per gallon, and the consumer consume 600 gallons of gasoline a year before the tax is introduced. Researchers find that the price elasticity and income elasticity of gasoline are 0.30 and 0.60 respectively. How many gallons of gasoline will he consume after a 10% gasoline tax is introduced? Use the information in part (g) and the Slutsky equation introduced in our notes to evaluate the income and substitution effects of the gasoline tax