Illustrate what will be consumer consumption of gasoline

Reference no: EM1347800

1- Suppose X & Y are 1-2 perfect substitutes, i.e. the consumer's satisfaction from every unit of X is twice of a unit of Y. Suppose in 2009 , PX = 3, PY = 2 and the consumer income is $12. In 2010, PX = 2.5, PY = 1.

a) Write down the utility function.

b) What is the ideal price index?

c) What is the Laspeyres price index?

d) Calculate ideal and Laspeyres indices if U(X, Y) = Min (2X, Y)

2- Suppose consumer has to choose between the composite good Y (PY=$1 /unit) and gasoline, G. Assume the consumer utility function is: U (G, Y) = and his income is $210/mo.

a. If originally PG=$1.50 /gallon, how much gasoline the consumer is going to consume?

b. The government imposes a tax of $0.50 /gallon on gasoline. Assume all the burden of taxation is borne by the consumers. How much gasoline the consumer is going to consume after taxation?

c. Suppose after taxation that the consumer is given a payroll tax rebate that happens to be exactly equal to the amount of gasoline tax he pays. Illustrate what will be the consumer consumption of gasoline now and how much will be the amount of rebate?

Reference no: EM1347800

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