A consumer's preferences for food (x) and clothes (y) are represented by the utility function u(x,y)=...

A consumer's preferences for food (x) and clothes (y) are represented by the utility function u(x,y)= x + 2 ln(y). The prices of food and clothes are p_x and p_y euros/unit, respectively, and the consumer's income is I euros.

A. (10 points) Describe the consumer's problem, including her budget constraints, and calculate her ordinary demand functions, x(p_x,p_y,I) and y(p_x,p_y,I).

B. (10 points) For prices and income (p_x,p_y,I)=(1,1,3), calculate the substitution and income effects over the demand of y of a 1 euro/unit sale tax on this good. Calculate also the tax revenue.

C. (10 points) Calculate the equivalent variation of the tax in part B and verify that it is greater the tax revenue.

Expert Solution

Rahul Sunny answered 2 years ago

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