Gino derives utility from only two goods, cakes (Qc) and tea (Q). His utility function is...

  

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Gino derives utility from only two goods, cakes (Qc) and tea (Q). His utility function is as follows: U (Qc, Qt) = (Qc)(lt). The marginal utility that Gino receives from cakes (MUC) and tea (MUC) are given as follows: MUC = Q₁; MU₁ = Qc- Gino has an income (I) of £200 and the price of cakes (P) is £5 and tea (P,) is £2.50. (a) What quantities of Qc and Qt will maximize Gino's utility? [10 marks] (b) Holding Gino's income and P, constant at £200 and £2.50 respectively, what is Gino's demand curve for cakes? [20 marks] (c) Suppose that a tax of £1.5 per unit is levied on the tea. How will this alter Gino's utility maximizing market basket of goods? [20 marks] (d) Suppose that, instead of the per unit tax in (c), a lump sum tax of the same dollar amount is levied on Gino. What is Gino's utility maximizing market [20 marks] basket? (e) The taxes in (c) and (d) both collect exactly the same amount of revenue for the government, which of the two taxes would Gino prefer? Show your answer numerically and explain why Gino prefers the per unit tax over the lump sum tax, or vice versa, or why he is indifferent between the two taxes. [15 marks] f) In the theory of consumer behaviour, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words. [15 marks] Gino derives utility from only two goods, cakes (Qc) and tea (Q). His utility function is as follows: U (Qc, Qt) = (Qc)(lt). The marginal utility that Gino receives from cakes (MUC) and tea (MUC) are given as follows: MUC = Q₁; MU₁ = Qc- Gino has an income (I) of £200 and the price of cakes (P) is £5 and tea (P,) is £2.50. (a) What quantities of Qc and Qt will maximize Gino's utility? [10 marks] (b) Holding Gino's income and P, constant at £200 and £2.50 respectively, what is Gino's demand curve for cakes? [20 marks] (c) Suppose that a tax of £1.5 per unit is levied on the tea. How will this alter Gino's utility maximizing market basket of goods? [20 marks] (d) Suppose that, instead of the per unit tax in (c), a lump sum tax of the same dollar amount is levied on Gino. What is Gino's utility maximizing market [20 marks] basket? (e) The taxes in (c) and (d) both collect exactly the same amount of revenue for the government, which of the two taxes would Gino prefer? Show your answer numerically and explain why Gino prefers the per unit tax over the lump sum tax, or vice versa, or why he is indifferent between the two taxes. [15 marks] f) In the theory of consumer behaviour, certain axioms about the nature of preferences imply that indifference curves cannot cross. Which axioms imply this? Explain your answer using a diagram and using words. [15 marks]

Answer rating: 100% (QA)

a Ginos utility function is Ucq cq Marginal utility of cakes MUc q Marginal utility of tea MUq c Inc... View the full answer