Taxation and Redistribution PS 1

Assume that the price of a bus trip is $2,00, and the price of a ride share (e.g.,

using a company like Uber or Lyft) is $5,50. What is the relative price of a trip using

a ride-share company, in terms of bus trips? What happens when the price of a bus

trip rises to $2,75?

Draw the demand curve Q=250-10P. Calculate the price elasticity of demand at

prices of $5, $10, and $15 to show how it changes as you move along this linear demand curve.

You have $100 to spend on food and clothing. The price of food is $4 and the price

of clothing is $10.

a) Graph your budget constraint.

b) Suppose that the government subsidizes clothing such that each unit of clothing is

half price, up to the first five units of clothing. Graph your budget constraint in this

circumstance.

Explain why a consumer’s optimal choice is the point at which her budget constraint

is tangent to an indifference curve.

Consider a free market with demand equal to Q=900-10P and supply equal to

Q=20P.

a) What is the value of consumer surplus? What is the value of producer surplus?

b) Now the government imposes a $15 per unit subsidy on the production of the good.

What is the consumer surplus now? The producer surplus? Why is there a deadweight

loss associated with the subsidy, and what is the size of this loss?

You have $4,000 to spend on entertainment this year (lucky you!). The price of a

day trip (T) is $40 and the price of a pizza and a movie (M) is $20. Suppose that your

utility function is:

U(T, M) = T^(3/4)M^(1/4)

a) What combination of T and M will you choose?

b) Suppose that the price of day trips rises to $50. How will this change your decision?