Question

2. Consider an economy with two goods, x and y with prices px and py, respectively. We observe the following choices made by Rob: if px > py he chooses to consume only y, and if py > px he chooses to consume only x. Suggest a utility function for Rob that represents preferences consistent with the given data. (5m)

3. Consider a market for used cars. There are many sellers and even more buyers. A seller values a high quality car at 800 and a low quality car at 200. For any quality, the value to buyers is m times the value to sellers, where m > 1. All agents are risk-neutral. Sellers know the quality of their own car, but buyers only know that 2/3 of the cars are low quality and the remaining 1/3 of them are high quality. For what values of m do all sellers sell their used cars? 4. If the price elasticity of supply is zero, a tax on suppliers will raise the market price. Is this true or false? Explain your answer. (5m)

4. If the price elasticity of supply is zero, a tax on suppliers will raise the market price. Is this true or false? Explain your answer. (5m)

6. An individual consumes two goods and her preferences satisfy non-satiation. It follows that at least one of the two goods must be a normal good. Is this true or false? Explain your answer. (5m)

7. Under first-degree price discrimination, a monopolist produces the efficient output. Is this true or false? Explain using an appropriate diagram. 8. Several generators pollute the environment by emitting carbon dioxide. Generators have different costs of reducing carbon emissions. The government wants to put a cap on total emissions. Putting a cap on each generator is more efficient compared to issuing tradeable emissions permits to each generator. Is this true or false? Explain your answer. (5m)

Answer #2

2. We are given the choices made by rob. He only consumes good X when the price of good X that is Px is less than the price of good Y that is Py. And when the price of good Y that is Py is less than the price of good X that is Px, he only consumes good Y.

With the given information we can infer one thing about rob's
choices that he doesn't care about what good is he consuming. He
can even consume only good X or good Y depending which is cheaper
to buy. Rob is substituting good X for good Y when Py is less than
Px and he is substituting good Y for good X when Px is less than
Py. So with the given information we can say that rob's preferences
are of **perfect substitutes.** And
mathematically it can represented as,

U(X,Y) = X + Y

He will consume only X when Px < Py

He will consume only Y when Py < Px.

answered by: anonymous

6. An individual consumes two goods and her preferences satisfy
non-satiation. It follows that at least one of the two goods must
be a normal good. Is this true or false? Explain your answer.
(5m)
7. Under first-degree price discrimination, a monopolist
produces the efficient output. Is this true or false? Explain using
an appropriate diagram. 8. Several generators pollute the
environment by emitting carbon dioxide. Generators have different
costs of reducing carbon emissions. The government wants to put a...

7. Under first-degree price discrimination, a monopolist
produces the efficient output. Is this true or false? Explain using
an appropriate diagram. 8. Several generators pollute the
environment by emitting carbon dioxide. Generators have different
costs of reducing carbon emissions. The government wants to put a
cap on total emissions. Putting a cap on each generator is more
efficient compared to issuing tradeable emissions permits to each
generator. Is this true or false? Explain your answer. (5m)

8. Several generators pollute the environment by emitting carbon
dioxide. Generators have different costs of reducing carbon
emissions. The government wants to put a cap on total emissions.
Putting a cap on each generator is more efficient compared to
issuing tradeable emissions permits to each generator. Is this true
or false? Explain your answer. (5m)

A firm produces two goods,x, and y, that have demand functions
px =20- 2x and py =25-4y respectively.The firm’s cost function is C
=1000+10x+5y.
a. Find the quantities and prices of x and y that maximize the
firm's profits
. b. Find the value of the price elasticity of demand for both
goods in equilibrium.

4. Consider an individual making choices over two
goods, x and y with prices px = 3 and py = 4,
and who has income I = $120 and her preferences can be represented
by the utility function U(x; y) =
x2y2. Suppose the
government imposes a sales tax of $1 per unit on good x: ( Hint:
You need to find the initial, final, and hypothetical optimal
consumption bundles, their corresponding maximized utility levels
and/or minimized expenditure and compare. )...

Consider an individual making choices over two goods, x and y
with prices px = 3 and py = 4, and who has income I = 120 and her
preferences can be represented by the utility function U(x,y) =
x2y2. Suppose the government imposes a sales tax of $1 per unit on
good x:
(a) Calculate the substitution effect and Income effect (on good
x) after the price change. Also Illustrate on a graph.
(b) Find the government tax revenues...

Emily's preferences can be represented by u(x,y) =
x1/2 y1/2 . Emily faces prices
(px,py) = (2,1) and her income is $60. (some
formulas in chapter 5 might help)
Her optimal consumption bundle is:
______________ (write in the form of (x,y) with no space)
Now the price of x increases to $3 while price of y remains the
same
Her new optimal consumption bundle is:
______________ (write in the form of (x,y) with
no space)
Her Equivalent Variation is:
$_______________
Her...

In a two goods (x and y) world, two districts (A and B) are
identical, except the prices of good x (Px) and good y (Py) are
higher and lower in district A, respectively. Suppose two identical
individuals (i.e. same preferences and income) live in the two
districts separately and their optimal choices are interior
solutions. Evaluate the following statement: ‘The MRS at the
optimal choices of two individuals are the same’. True, false, or
uncertain? Explain your answer intuitively...

In a two goods (x and y) world, two districts (A and B) are
identical, except the price of good x (Px) is higher in district A.
Suppose two identical individuals (i.e. same preferences and
income) live in the two districts separately and their optimal
choices are interior solutions. Evaluate the following statement:
‘The MRS at the optimal choices of two individuals can be
the same’. True, false, or uncertain? Explain your answer
intuitively and graphically.

Consider a Ricardian environment. Two countries (A and B) make
two goods (X and Y). Country A has 60 units of labor and country B
has 120 units of labor. The unit labor requirements are as
follows:
X
Y
Country A
1
2
Country B
2
3
a. Draw the PPF for each country
b. Calculate the autarky prices for each country (Px/Py)
c. Which country has an absolute advantage in good X? Good Y?
Which has a comparative advantage...

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