Question

4. A. A consumer has $360. Good X costs $4 each. Good Y costs $8 each. Draw the budget line. Label it “budget line A.” Preferences are perfect complements: utility = min{X,Y}. Both X and Y are normal goods. Numerically solve the consumer’s budget choice. Label it on the diagram, including the indifference curve, and all solved numbers.

B. A consumer has $400. Good X costs $6 each. Good Y costs $7 each. Draw a new budget line, on a new graph. Label it “budget line B.” Once again, preferences are perfect complements: utility = min{X,Y}. Both are normal goods. Numerically solve the consumer’s budget choice. Label it on the diagram, including the indifference curve, and all solved numbers.

C. Herman Cain ran for president in the year 2000. He made the following policy proposal: Reduce the federal income tax, and make up the federal revenue shortfall with a new national sales tax charged, in addition to the state and local sales tax. Total federal tax revenue would be unchanged. Herman Cain stated that the average person would be better off. Use the objective of the consumer (utility maximization, as illustrated in parts A and B) to explain and evaluate if Herman Cain was right or wrong.

Answer 1

Hi

The answer of the following question are as follows :

Ans. A)The consumer and the $360, price d gen x (P,) = +4 cdn price 4 gond Y P)- > Budget constraint is: 4x+8y= 360.9f the consumer buys only you then xeo4)*89-30 30 Y=45) - Vertical intercept =45. > Y> 360.

So Df is the consurner of y x,then y=0 =)Y X R(0)=0 - 4X =360 x = 90a Oriental intercept = 90 The budget are à shown in fig.1.given below 360 The preference will be represented by U(XY) min{x 1] > Optimal bundle must satisfy the condition x=Y.

Now Using x=y in the budget constraint, 4x+9x 360 > 12 x= 360 x = 30 tar so, X= Y =30 an x. Y) = (30,30) u ma optimal bundle The optimal bundle is shown by paint E in fig.2, when budget constraint touches L-shaped indifference curve ic

Ans.B) Now Similarly, with $400 as income, P-6 a P- 7, the vertical intercept = 400 = 57.14 are the horizontal intercept = 4006667 We preferences Imieniny}, >13 x=400 ) x- 400 >x =Y = 30:17*=The budget constraint: 6x+7Y =400 Now sing x-Yen budget constraint: 6x+7 X=400.

Ans.C)  So now the 9l income tax is reduced, the budget line would shift in word. However, f it is made up by increasing sales tax to ensure that tax revenue cumains same, then the sales tax may O increa he practiced the goods. For simplicity, we may Consider that the sales tax percent across goods. same f that is the case, then there will be no change in budget constraint 7 we decrease income tax and increase prices on such a cow. there will ot be any impact m consumer' consumption.so on the other hand, if the prices are changed by different rates, then slope d the budget line will change. For example, f price of is bureau more, as compared to price f 1. then the budget line would be more steepere. But f t overall c affordability doesn't change, then the optimal bundle shown in fig. 1 and 2 will be astrobank. Given the preferences, we know that goods are perfect complements 4 each other. So, the substitution effect ui aut be there and all price effect will be attributed to income out. Therefore, Herman Cain was night in his observation.

I hope I have served the purpose well.

Thanks.