Microeconomics Problem Set 1: Sam's Budget Constraint & Taxes on Coffee and Cigarettes - P, Assignments of Microeconomics

Download Microeconomics Problem Set 1: Sam's Budget Constraint & Taxes on Coffee and Cigarettes - P and more Assignments Microeconomics in PDF only on Docsity! Econ 100A: Intermediate Microeconomics Professor Justin Marion Problem Set 1 Due in class Monday April 13 30 points Two goods are consumed by Sam, coffee and cigarettes. Sam has $50 to allocate between these two goods. The price of a cup of coffee is $2 and the price of a pack of cigarettes is $5. a. Write down the inequality describing Sam’s budget constraint. Draw the budget line on a graph, taking care to label the slope and intercepts. Shade the area representing the budget set. b. The government, worrying about the health effects of smoking, adds a quantity tax of $1 per pack of cigarettes that must be paid by Sam. Draw Sam’s new budget line on a new graph, indicating the new slope and intercepts. c. The cigarette company decides that its consumers are not hooked enough on their product and want to encourage more smoking. For every five packs purchased, they now give away one for free. Draw Sam’s new budget line, again carefully labeling the intercepts. (Ignore the quantity tax.) d. Return to the case without the tax or the free cigarette offer. The government reads recent research touting the athletic performance benefits of coffee and decides to ensure that people are drinking enough caffeine. They impose a lump- sum income tax of $10 on each of its citizens and use the tax revenue to give each citizen five cups of coffee. Graph Sam’s new budget line and shade the feasible set. (One point bonus question: What would Sam’s budget line look like if he could resell at $2 per cup some of the coffee that was given to him?) e. Sam states he prefers cigarettes that are long lasting, low in tar content, and have cartoonish characters in the advertisements. Are his stated preferences transitive and complete? How would your answer change if his statement was modified to state that he preferred one cigarette to another if it was better on at least two of the three dimensions, and was otherwise indifferent?