ECO 330TPOLITICAL ECONOMYSPRING
ECO 330TPOLITICAL ECONOMYSPRING 2017HOMEWORK #4(due 2/15 at noon)1. A consumer starts with an income of $120 which she can spend on either food (measured on thex-axis), or on booze (measured on the y axis). If the price of food is $2 and the price of booze is $5,the consumer’s budget constraint is 2x + 5y = 120.a) Assume this consumer is given and additional $40 in income. Make the equation for the newbudget constraint and draw it. (1 point)b) Now assume, instead of the $40, the consumer is given 20 units of food. Assume the consumeris unable to trade away food she is given. Draw the budget constraint for this situration in a separatepicture from (a) (Hint: In this case, what are the coordinates of the point where the consumersspends all her income on booze?). (1 point)c) Explain why no one can be better off in the situation in (b) than in (a). (1 point)d) Explain how someone can be worse off in (b) than in (a). Illustrate this scenario by drawing apicture with: (3 points)the original budgetthe budget in (b)the optimal bundle under budget (b)the optimal bundle if they had the budget in (a) (These last two should include indifferencecurves)e) Explain why someone adhering to a libertarian or utilitarian philosophy would never choose thepolicy in (b) over the policy in (a), but someone who believed in paternalism and merit goods might.(2 points)2. A good is currently produced in a perfectly competitive market. The market demand for the goodis P = -0.01QD + 15. There are 50 firms in this market each with a MC = 0.8q f + 2.a) Show that the market supply is P = 0.016Q S + 2 and find the equilibrium price and quantity. (2point)b) Place a tax of 5.2 per unit on the consumers of this good. Find the new market price and quantity,the total tax revenue, and how much of that comes from producers and how much from consumers.You will find that one of the two pays more of the tax. Explain why this makes sense. (3 points)c) Now place the tax on the consumer and show that, while the market price changes, all the otheranswers from above remain the same. (2 points)
