Practice test
Consider the following budget constraint:
I = PB*B+ PT*T
and Utility Function
U (x, y) = (.6T.5 + .4B.5)1/.5
Where B is Beer, T is Tacos, PB is the price of beer, PT is the price of Tacos, and I is income
1. Given this information, find the optimal amount of tacos if income is 20, the price of beer is 2 and the price of tacos is 4.
2. Given this information, find the optimal amount of beer if income is 20, the price of beer is 2 and the price of tacos is 4.
3. With your answers from the previous 2 questions, find the utility that would be generated at the optimal combination of beer and tacos
4. Given this information, find the optimal amount of beer if income is 20, the price of beer is 2, the price of tacos is 4, and a 1 dollar tax on each beer consumed. Do not round your answer.
5. Given this information, find the tax revenue that you would generate (i.e., your spending) if you consumed the optimal amount of beer. Again assume, income is 20, the price of beer is 2, the price of tacos is 4, and a 1-dollar tax on each beer consumed. Do not round your answer.
6. Assume income is 20, the price of beer is 2, the price of tacos is 4, and a 1-dollar tax on each beer consumed. Do not round your answer.
7. Under the new tax regime (1 tax on beer), to achieve the same level of utility from question 9, you would have to have how much extra income?
8. Assume income is 20, the price of beer is 2, the price of tacos is 4, and a 1 dollar tax on each beer consumed. Do not round your answer.
9. The one-dollar tax on beer, would cause you to buy ____ more tacos due to the substitution effect (HINT: CONSIDER THE SUBSTITUTION EFFECT ONLY).
10. Assume income is 20, the price of beer is 2, the price of tacos is 4, and a 1 dollar tax on each beer consumed. Do not round your answer.
11. The one-dollar tax on beer would cause you to buy ____ fewer tacos due to the income effect (HINT: CONSIDER THE INCOME EFFECT ONLY).
12. Assume income is 20, the price of beer is 2, the price of tacos is 4, and a 1 dollar tax on each beer consumed. Do not round your answer.
13. Relative to your initial optimal combination of beer and tacos (i.e., what you chose before the tax), the one-dollar tax on beer would cause you to buy ____ fewer beers.
14. Assume income is 20, the price of beer is 2, and the price of tacos is 4. Do not round your answer.
15. Suppose the government instead of taxing beer, proposed a flat tax that generated the same revenue as the per-unit tax (i.e., your answer from question 11). If the government did so, the optimal amount of tacos to consume would be ______ tacos
16. In terms of utility, the flat tax would make you _____ units of utility better off relative to the good specific tax.