Reference no: EM132206652

Question: 1. Imagine the market price for a pack of cigarettes is $6 per pack, and there are no taxes. Assume that each pack does a total of $5 worth of health damage to the smoker in the form of increased cancer risk, heart disease, etc. Further, each pack does a total of $3 worth of damage to non-smokers via secondhand smoke. Assume all people are fully aware of these damages and cigarettes are not addictive.

• Assume that Bart is willing to pay $8 for a pack of cigarettes, but not a penny more. In this market, where the price of cigarettes is $6 per pack, is it privately efficient for Bart to buy a pack at this price?

• Is it socially efficient for Bart to buy a pack of cigarettes at this price?

• Suppose that a new fertilizer lowers the cost of tobacco production, and the market price of cigarettes is now $1. Depending on your answers to parts (a) and (b), is it now privately efficient for Bart to smoke? Socially efficient?

2. Refer to the"constraint"between health and all other goods (X) as drawn in class. Suppose a new miracle pill is developed that increases the maximum attainable health (which we had labeled as point "F" in class-- the highest point at which the constraint crosses the y-axis).

• Draw the original constraint before the miracle pill is available.

• On the same graph, draw a new constraint with the miracle pill available.

• How does the miracle pill affect the level of health and other goods (X) a consumer will choose? You will need to add indifference curves to accomplish this.

3. Continuing with the same constraint as in the question above, imagine the government puts a tax on the other goods (X).

• Draw the original constraint before the tax is imposed.

• On the same graph, draw a new constraint with the tax.

• How does the tax affect the level of utility the consumer will achieve?

You will need to add indifference curves to accomplish this.