Exam 5: Consumer Welfare and Policy Analysis

The compensation variation and equivalent variation will be closer to each other when

-The above figure shows an indifference map for a person's choices between leisure and consumption.Derive this person's labor supply curve for wage rates of $5,$10,and $15.

A tax cut will unambiguously lower income-tax revenue.

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

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L^0.5.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.

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

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

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

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.

Ralf's uncompensated demand function for shoes is given by Q = 100/p.What is the change in consumer surplus when the price of shoes rises from p = 20 to p = 25?

The change in total welfare from a 10% increase in price will depend only on the elasticity of demand.

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.

-The above figure shows an individual's demand curve for time per month spent telecommunicating while driving (talking on the car phone. )A car phone is useless except for talking with somebody who is not in the car.If calls are priced at ten cents per minute,what is the consumer surplus derived from talking? What is the most this person would pay for the car phone? Explain.

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?

Ann and Bill each spend $30 per month on cigarettes when the price is $1 per pack.Draw a graph to illustrate that the consumer with the less elastic demand will suffer the greater loss of consumer surplus when the price of cigarettes increases.Explain and label the figure.

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis.Show that a person who works can work fewer hours and increase utility when the wage rate increases.

-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.If the price were to increase by ten cents per minute,consumer surplus would

A quota will reduce consumer welfare when

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.

Suppose you work for a government agency that is considering removing certain agricultural subsidies.The removal of these subsidies will increase the price,thus lowering consumers' welfare.Because only aggregate market data is available,you are unable to measure the exact values for the compensated and equivalent variation by consumer.However,you are able to estimate the change in market consumer surplus.Assuming agricultural products are normal goods,how does your estimate of consumer surplus compare to the unknown EV and CV? Explain.Under what conditions will the three measures of welfare be close to one another?