SOLUTION: Jacob spends all his income on movie tickets (good 1) and magazines (good 2). His utility function can be represented by u(x1, x2) = x1x2. His income is m = $100. The prices are p1
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-> SOLUTION: Jacob spends all his income on movie tickets (good 1) and magazines (good 2). His utility function can be represented by u(x1, x2) = x1x2. His income is m = $100. The prices are p1
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Question 995103: Jacob spends all his income on movie tickets (good 1) and magazines (good 2). His utility function can be represented by u(x1, x2) = x1x2. His income is m = $100. The prices are p1 = $10 and p2 = $5.
a. Derive Jacob’s optimal consumption bundle. Show the complete cal- culation, and illustrate your answer graphically (draw the indifference curves and the budget constraint).
b. How would your answer change to part a. if Jacob’s utility function were given by u(x1, x2) = 7x21x2?
c. What is Jacob’s marginal utility of movie tickets when he buys 5 movie tickets and 8 magazines? Compute this marginal utility for both utility functions given above.
d. Now suppose the government levies a 25% tax on each movie ticket purchased. Derive Jacob’s consumption bundle and illustrate it in the same graph that you drew in part a.
e. Would Jacob prefer a $10 income tax (i.e., lump-sum tax) to the the 25% value tax on movie tickets? Which scenario would the govern- ment prefer? Explain your answers.
