Microeconomics Answers

Suppose that Billy's preferences over baskets containing milk (good x), and coffee (good
y ), are described by the utility function U(x; y ) = xy +2x. Billy's corresponding marginal
utilities are, MUx = y + 2 and MUy = x:
Use Px to represent the price of milk, Py to represent the price of coffee, and I to represent
Billy's income.

Suppose that Px = $1 and I = $40. Find the equivalent variation for an
increase in the price of coffee from Py1 = $4 to Py2 = $5

with the aid of graph of total product, indentify and explain increasing and decreasing return to scale

If Kelly's budget has an X intercept of 40 and a Y intercept of 60, and PY is $20,
a. What is Kellys income?
b. What is Price of good X?
c. What is the slope of the budget line?

What is meant by steady state in the Solow model? Derive conditions for steady state in
an economy. What is the significance of decreasing returns in the Solow model?

How knowledge of price elasticity of demands magnitude can be of use to a government contemplating a commodity tax?

A newly-elected politician has proposed revenue-neutral tax reforms that would benefit highearning households (those with annual incomes above $1,000,000) by a total of $2.13 billion, & at the same time would eliminate a total of $1.84 billion in tax credits that had been provided to low-earning households (those with annual incomes below $30,000). The difference between these figures ($290 million) represents the amount that would otherwise be lost due to additional distortions created by the old tax policy (nobody received this $290 million under the old policy; it was simply lost), & the $2.13 billion benefit to the rich and $1.84 billion cost to the poor are the only effects of this proposal. What must be true in order for this proposal (repealing the old policy) to not be worthwhile from a social perspective? In other words: under what circumstances, if any, should the proposal not be implemented? (there will be a calculation involved here & be sure to address both efficiency and equity in your answer.)

The government is considering implementing a policy that would increase consumer surplus by $24 million and decrease producer surplus by $31 million in a particular market. Consumers in this market are a particularly disadvantaged group (e.g., poor), while producers are a particularly advantaged group (e.g., rich). The social weight on these consumers is 1.4 and the social weight on these producers is 1.
a. Calculate the unweighted change in total surplus resulting from this policy, and calculate the distributionally-weighted change in total surplus resulting from this policy.
b. Is this policy worthwhile from a social perspective, and why or why not? (Be sure to address both efficiency and equity in your answer.)

Assume a population of single individuals where the reservation wage is related to V as
follows:
w* = 0.6V - 100
a. Is Tc normal? Explain.
b. Assume income and substitution effects for hours of participants exactly offset one
another and that V has a normal (bell curve) distribution; what is the shape of the supply
curve of total hours?
c. Suppose instead that the distribution of V is such that reservation wages range from 0
to 20 and that they are uniformly distributed over this range. What is the shape of the
supply curve of total hours? What is the elasticity of total hours with respect to the wage?

you are choosing between two goods. X and Y, and your Marginal utility from each is as shown in the table below. if your income is $9.00 and the price of X and Y are $2 and $1, respectively, what quantities of each will you purchase to maximize utility?

How knowledge of price elasticity of demands magnitude can be of use to a business firm contemplating a price increase?