Exam 5: Consumer Welfare and Policy Analysis

During droughts,cities often impose water use restrictions on consumers.Suppose a representative consumer has preferences for Water (W)and other goods (X)given by the utility function: U(W,X)= WX. Suppose the price of other goods is $1 and the price of water is initially 50¢.The consumer has a budget of $50/week. a.How much water will the consumer purchase each week? b.Suppose the government imposes a quota on water use of 50 units/week.Show that the quota reduces the representative consumer's utility. c.By how much does the quota harm the representative consumer? Specifically,compute the equivalent variation of the quota.

A quota will reduce consumer welfare when

If Bobby thinks that leisure is an inferior good,then his labor supply curve

Jeong's uncompensated demand for gizmos is given by Q = 30 - 2p.Jeong's marginal willingness to pay function is

In response to an increase in the wage rate,the income effect will usually cause a person to

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.

Sarah's demand curve for whiskey has the same slope as Pete's; however,it lies to the right of Pete's.An increase in the price of whiskey will cause

Ted's uncompensated demand function for bacon is given by Q = 15/p.What is Ted's change in consumer surplus when the price of bacon rises from p = 3 to p = 5?

If the marginal tax rate rises above t * = 63%,tax revenue will decrease because

Sandy's uncompensated demand for candy is given by the equation Q = 15/p,where Q is the quantity of candy and p is the price.When the price of candy rises from $1 to $3,the change in consumer surplus is

The Equivalent Variation resulting from a quota is best defined as

You enter a store and buy a bottle of soda.Do you usually receive consumer surplus?

Sarah and David both have linear demand curves for lemonade.Sarah's demand is more elastic than David's.At the current price of $0.50 per glass,they both choose to buy 5 glasses.A change in the price of lemonade to $0.75 per glass will

Suppose consumers of cigarettes can be classified into two groups: heavy users and light users.Heavy users purchase more cigarettes and are less sensitive to price changes relative to light users.To determine whether a heavy user suffers a greater loss of consumer surplus than a light user does when the price of cigarettes increases,one would need to know

Jeremy derives all of his utility from consuming milk shakes; he devotes his entire $20 allowance to milk shakes each week.Suppose the price of milk shakes rise from $2 to $4.Compute Jeremy's Compensating Variation and Equivalent Variation.

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L⁰.⁵.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply curve when the person wins a lottery prize of $100 per day.

A consumer has $100 of income to spend on books and other goods (a composite good).Books cost $20 each and the consumer's optimal bundle is to consume purchase three books while spending the rest of the income on the composite good.The consumer is then given a gift of a book.Assume the consumer is unable to sell the book.Use two separate graphs to demonstrate each of the two possible scenarios: i.A consumer that is indifferent between the book gift and a cash gift of $20. ii.A consumer that strictly prefers a $20 cash gift to a book. To get full credit,accompany each graph with a brief explanation and draw your graphs clearly and well labeled.

Ed's utility from vacations (V)and meals (M)is given by the function U(V,M)= V²M.Last year,the price of vacations was $200 and the price of meals was $50.This year,the price of meals rose to $75,the price of vacations remained the same.Both years,Ed had an income of $1500. a.Calculate the change in consumer surplus from meals resulting from the change in meal prices. b.What is the compensating variation for the price change in meals? c.Calculate the equivalent variation for the price change in meals.

-The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone).The current price is 35¢ per minute.What is the consumer surplus at the current price?

Suppose an analyst attempts to estimate a consumer's willingness to pay for a policy that lowers the price of childcare by measuring the amount of income that can be taken away from the consumer (at the new price)such that they can just afford their original bundle of goods.Is this correct? If not,is it more or less than the true compensating variation? Explain with a graph.