Consider a government that is contemplating introducing a gasoline tax to reduce gasoline
consumption together with a (lump-sum) rebate to consumers to alleviate the negative
e ect of the gasoline tax on their well-being. Use an indi erence curve map for two goods
(gasoline and other goods) to show
(a) the equilibrium if the rebate is based on the nal (post-tax) consumption of gasoline,
(b) the equilibrium if the rebate is based on the original (pre-tax) consumption of gasoline,
(c) that the government pays out more than it receives in tax revenues if the rebate is
based on the original consumption of gasoline, and
(d) that consumers are better o ...view middle of the document...
Illustrate them graphically using ordinary and compensated demand curves and comment on how they relate to one another.
(c) Assume that a = b = 1 and p1 = 1 and consider an increase in p2 from 1 to 2.
(i) Compute the compensating variation.
(ii) Compute the equivalent variation.
(iii) Compute the change in consumer surplus.
Consider a rm producing bicycle frames. There are only two inputs available: capital (K)
and labour (L). For each of the below listed cases, graphically illustrate how the rm would
go about choosing the combination of K and L that minimizes the cost of producing a given
number of frames, compute the conditional factor demand functions, and the long-run cost
function. Let q, w, and v denote the quantity of bicycle frames, the wage rate, and the
rental rate of capital, respectively, and assume that w > v.
(a) q = 2L + K
(b) q = L2 + K 2
(c) q = min (L; 2K)
(d) q = L
Consider a rm which houses using capital (K), labour (L), and land (T ). The production
function is given by q = K 0:25 L0:25 T 0:5 . The per-unit costs of K, L, and T are vK , w, and
vT , respectively.
(a) Compute the rm's short-run total cost function when both K and T are xed and
L is variable.
(b) Compute the rm's short-run total cost function when T is xed and both K and L
Consider a rm which produces hockey sticks using capital (K) and labour (L). The
production function is given by q = KL. The per-unit costs of K and L are v and w.
(a) Compute the rm's short-run total cost function.
(b) Compute the rm's long-run total cost function and determine whether returns to
scale are increasing, constant, or decreasing.
(c) Compute the rm's long-run total cost function using the short-run total cost function.
Consider a rm producing output y using inputs x1 and x2 . Use appropriate graphs to:
(a) illustrate the usual cost-minimizing situation and indicate what condition must hold
at the minimum point;
(b) describe the relationship between short-run and long-run total cost, average cost, and
marginal cost functions when there are constant returns to scale in the long run;
(c) describe the relationship between short-run and long-run total cost, average cost, and
marginal cost functions when there are...