Suppose that you work at the department of social services in the federal government. You have...

Suppose that you work at the department of social services in the federal government. You have been tasked with investigating how to reduce the consumption of good x2 by consumers. You have been told that you have two options: Policy A imposes a tax on each unit of x2 to be collected from the consumer’s; Policy B imposes a lump sum tax on the agent’s income. Suppose that consumer’s preferences over two goods can be approximated with the utility function u(x1, x2) = x1 x2^2 .

1. Derive the Marshallian demand functions.

2. Compute the consumer’s indirect utility function.

3. Suppose that p1 = 10, p2 = 5 and m = 300. What is the consumer’s consumption bundle? What is her utility level?

4. Which Policy would the consumer prefer? You must provide support for your arguments

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Expert Solution

Rahul Sunny answered 1 year ago

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