Homework answers / question archive / 1)Suppose Mona and Tom are the only citizens in Winterland and their utility functions are presented by the following equations: Um = 0

1)Suppose Mona and Tom are the only citizens in Winterland and their utility functions are presented by the following equations: Um = 0

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1)Suppose Mona and Tom are the only citizens in Winterland and their utility functions are presented by the following equations: Um = 0.5 In Xm - 0.5 In Pm Ut = 0.5 In Xt -0.5 In Pt where X represents consumer goods and services and P pollution and in the natural logarithm. Assume Xm = X+ =50 and Pm = P = 25. 1. What are the marginal utilities of X and P for Mona and Tom? 2. Assume the Social Welfare Function (SWF) is an unweighted sum of individual utilities. Write the SWF and calculate its value. 3. Assume Mona is rich, but Tom is impoverished. We take 5 units of X from Mona and give it to Tom and as a result of that Pm goes down to 20 and Pt increases to 30. How will SWF change? Show your calculations. 4. Now assume that the Tom's utility function changes as follows: Ut = 0.8ln Xt - 0.2 In Pt Calculate SWF given the allocation of X and P in (3). 5. Assume Mona lives now, but Tom is not yet born. Use the original utility functions, but assume Mona's consumption increases to 80 generating 25 units of pollution today and 30 units in future for Tom. Also, as a result of Mona's excessive consumption, Tom's consumption will decrease to 20. Calculate the value of the SWF 6. Now assign a weight of 2 to Tom's utility function in the SWF. Recalculate the SWF with the allocations in (5) and compare the results. What type of environmental standard does this SWF represent?

2)The government is going to impose a policy in the market for cigarettes and ask you for advice. We have few observations for a typical day of this market as follow: P 10 A B ? D 20 30 40 QP 90 60 30 0 QS 0 10 20 30
Government consider four policies: 1. A minimum legal price at $35. 2. A maximum quantity sold at 25 cigarettes per day. 3. A $4 tax on selling 4. A $2 tax on consumption e. Which policy causes the smallest quantity sold? f. Which policy causes the smallest deadweight loss? 8. Which policy is better for consumers in term of consumer surplus? h. Which policy is better for producers in term of producer surplus? i. Which policy causes the highest revenue for the government? j. Which policy do you suggest?

3)Use the following information to answer the questions that follows:

Renumeration 10 000

Net Trade surplus 8 000

Provision for depreciation 500

Indirect Taxation 700

Subsidies 1 000

Net factor payments 500

Calculate:

i) GDP at factor cost. (2 marks)

ii) GDP at market price. (2 marks)

iii) GNP at market price. (2 marks)

iv) National income. (2 marks)

d) Complete the table that follows: (8 marks)

Year	Total production	Price index	Nominal GDP	Real GDP (BASE YEAR 2010)
2010	5000	2
2011	5600	4
2012	6000	3
2013	6000	7