1. Consider a world with no income and sales taxes. The utility function of a representative...

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1. Consider a world with no income and sales taxes. The utility function of a representative consumer is given by u = p x1x2. Her budget constraint is given by 5x1 + 15x2 = 3000. Solve for the optimal consumption bundle that the consumer will choose. Now suppose the government is debating between a 10% áat sales tax on both the commodities or a 6% income tax. The government is going to have either the sales tax or the income tax but NOT both. Solve for the optimal consumption bundles under sales tax and under income tax regimes separately. Which regime (sales tax or income tax) raises higher revenue for the government? Calculate the precise revenue collection in each scenario. Which regime (sales tax or income tax) results in higher consumption for our representative consumer? Which regime (sales tax or income tax) results in higher utility for our representative consumer? If there are one million consumers like our representative consumer, how much of the two commodities will be demanded in the economy? (Compute the total demand with
	
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1. Consider a world with no income and sales taxes. The utility function of a represen-
p
tative consumer is given by u = x x .
1 2
Her budget constraint is given by 5x +15x = 3000.
1 2
Solve for the optimal consumption bundle that the consumer will choose.
Now suppose the government is debating between a 10% ?at sales tax on both the
commodities or a 6% income tax.
Thegovernmentisgoingtohaveeither the sales tax or the income tax butNOTboth.
Solve for the optimal consumption bundles under sales tax and under income tax
regimes separately.
Which regime (sales tax or income tax) raises higher revenue for the government?
Calculate the precise revenue collection in each scenario.
Which regime (sales tax or income tax) results in higher consumption for our repre-
sentative consumer?
Which regime (sales tax or income...

Robert · Accepted Answer

√
             

          √
          

 p1 x1 
price no tax 5 300 
price with sales 
tax 
5.5 272.7273 
price with 
income tax  
5 282
 P2 X2 
price no tax 15 100 
price with sales 
tax 
16.5 90.81 
price with 
income tax  
15 94
              

                

             
 

          

Nash equilibrium occurs when both the prisoners Confess. It is (confess, confess) with the pay 
off (-18.-18)
Country 2 has a dominant strategy of trade whereas country 1 does not have any dominant 
strategy. 
Nash equilibrium occurs at (Trade, Trade) with the pay- off (1000, 1000).
There is no pure strategy Nash equilibrium in this game.

1. Consider a world with no income and sales taxes. The utility function of a representative consumer is given by u = p x1x2. Her budget constraint is given by 5x1 + 15x2 = 3000. Solve for the optimal...

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