What is the mike welfare loss due to the tax

Reference no: EM131253505

1. Mike is using quasilinear utility function from sugar x and other stuff N: U(x, N) = 20√x + N. The price per unit of sugar is $p, and the price of other stuff is $1 per unit. Mike has an income of Y = 100. Assume that sugar is a continuous good.

(a) Assuming an interior solution, show that Mike's demand function Dx(p) for sugar is given by Dx(p) = 100/p2(100 divide P square) . Explain why this demand function is valid only as long as p > 1.

(b) If instead p ≤ 1, then Mike has a corner solution. At this corner solution, what is his consumption of N and x, as a function of p?

(c) Sketch Mike's demand curve for candy. Given a price of p, how is Mike's consumer surplus defined? Feel free to use your diagram as an explanation, but give a precise verbal definition as well.
The price of sugar used to be p0 = 2. A tax on sugar has led to the price of sugar increasing to p1 = 2.5. It can be shown by integration of Mike's demand curve, that his consumer surplus as a function of price is given by CS(p) = 100/p (100 divide P) as long as p ≥ 1.

(d) Using consumer surplus as a welfare measure, what is the Mike's welfare loss due to the tax?

(e) At price p1, how much sugar does Mike demand? Given this quantity, show that the amount of tax revenue being raised from Mike is equal to 8.

(f) Compare the value of Mike's welfare loss due the tax to the amount raised in tax revenue. Which is larger in magnitude? Can you explain why they are not the same? (Hint: Consider the effect of price changes.)

(g) Can you suggest an alternative policy that be better for both Mike and for the taxation authority? Assume the taxation authority care only about tax revenue, and Mike about his welfare.

2. Rackspace (a cloud-computing company) is relocating an engineer from San Antonio to San Francisco. Because of the difference in prices between San Antonio and San Francisco, Rackspace is offering a relocation premium to the salary of the engineer. To determine the size of the premium, the company uses the engineer's consumption bundle in San Antonio (given prices here), calculates the cost of buying this bundle in San Francisco, and then offers a premium exactly equal to the difference.

Is this is the smallest premium that Rackspace could offer that would not make the engineer worse off from relocating? Why or why not?

How would the amount by which one could reduce their calculated premium depend upon the nature of the engineer's preferences?

Reference no: EM131253505

Questions Cloud

Demand and supply equations for nails : Please assist: Greg's Hardware has determined the following demand and supply equations for nails

Why would blocking imports from a country such as china : Donald Trump's claim that imports take away jobs and lower American's well being. Why would blocking imports from a country such as China (or Canada) be unlikely to increase employment and well being in the US?

Write a report on ranging but not chainage in surveying : Write a report on ranging but not chainage in surveying

Receive reimbursement for college : A receive reimbursement for your college visit costs B schedule a tour of the college campus C attend a college class to see what it's like D Both B & C E All of the above

What is the mike welfare loss due to the tax : Mike is using quasilinear utility function from sugar x and other stuff N: U(x, N) = 20√x + N. Using consumer surplus as a welfare measure, what is the Mike's welfare loss due to the tax

Identify each team member and document their role on project : Have your team interview people involved in a systems development project at a local business or at your college or university.

Compare the characteristics and use of the different methods : Compare the characteristics and appropriate uses of the different methods and explain if your research question could best be answered through qualitative or quantitative methods, or a mix of both.

Annotated bibliography of the website : You must present an annotated bibliography of the website as well as explain why you feel that website was a prime example. Should be atleast 2-3 paragraph .You can also use addition websites but i just need the source and website and a works cited..

Representing consumer and producer surpluses : The market for blueberries in Nova Scotia is initially in equilibrium. Use a separate diagram in each situation. (Don't forget to label all relevant points, curves etc.) With the aid of appropriate diagrams:

User Account

All Pages