Due Friday, April 7 by 11:59 pm

Total Points = 40 points + 10 point BONUS question

Give clear, well-written answers to the questions below.  Please make your graphs legible and label all parts of the   graph (e.g., axes, lines, etc.). Assume that goods may be consumed in partial quantities (e.g., 3.54 espressos).  Please round your answers to two decimal places.

1.   (15 points) Assume that CJ has an annual income of $50,000, and they spend their income on gasoline (X) and all other goods (AOG) (Y).   The price of a gallon of gasoline is $5, and the price of AOG is $1/unit.  Their preferences can be represented by convex indifference curves.

a.   (4 pts) Illustrate their optimal choice (X*,Y*) on a graph, using indifference curve-budget line analysis. (Note: you do not have enough information to have numerical answers for X* and Y*).

b.   (11 pts) In an attempt to decrease the consumption of gasoline, the government is considering two taxes:  (1) per unit tax on gasoline or (2) tax on income.  The amount of tax is the same under both programs.

i.    (9 pts) Which option would leave the taxpayers better off?  Using your graph from part a, use an indifference curve and budget line analysis to explain and support your answer. Your answer should include a budget line, indifference curve, and optimal choice for each type of tax (per unit and lump sum) as well as for the initial bundle.

ii.  (2 pts) Both tax programs reduce the consumption of gasoline.  Under which tax is this reduction the greatest?

2.   (10 points) Assume that a person’s demand curve is represented by the following equation: q = 100 – 5P.

a.   (3 pts) Assume that the price is $10. Using a graph, illustrate their consumer surplus.

b.   (3 pts) What is numerical value of their consumer surplus?

c.   (4 pts) If the price falls to $5, what happens to the value of their consumer surplus? Include a numerical value in your answer. (You do not have to include a graph.)

3.   (15 points) Suppose that in response to an increase in the price of a delivered restaurant meal from $30 to $40,  quantity demanded of these meals falls from 200 to 150 and quantity of movies through streaming services falls from 100 to 85.

a.   (5 pts) Use the midpoint method to calculate the estimated price elasticity of demand for this price range.  Is the demand elastic or inelastic? Why?

b.   (5 pts) Will the restaurant meal revenue increase or decrease when the price increases?  Explain your answer using your price elasticity of demand answer in part (a).

c.   (5 pts) Use the midpoint method to calculate the estimated cross price elasticity of demand for this price range. What does this indicate about delivered restaurant meals and streaming movies? Why?