1. Consider a consumer who consumes good 1 and good 2 with her income . The prices of these goods are given by 1 and 2, respectively. A. Suppose that the consumer always spends 50% of her income on good 1 and the rest on good 2, regardless of the prices of the goods or her income. Calculate (algebraically) the consumer's marginal willingness to pay for good 1 (in terms of good 2). Does it decrease with the amount of good 1 the consumer consumes? If so (or if not), explain a basic reason why (or why not). Does the consumer follow the law of demand for good 1? Explain your answer in terms of the income and substitution effects. B. Suppose that the consumer's demands for good 1 and good 2 are estimated as 1=1021+2 and 2=1022+1. The prices of goods were 1=1 and 2=1. Due to an economic shock, the price of good 1 increases from 1=1 to 1=2. How does this shock affect the consumer's well-being (i.e., utility from consumptions)? Explain your answer using graphs. Using the change in the consumer's surplus, calculate the impact of the shock on the consumer. 2. Consider a consumer who consumes good 1 and good 2 with her income . The price of the goods are given by 1 and 2, respectively. A. Suppose that a sales tax is levied on the consumption of good 2. Against the sales tax, what would happen to the consumption of good 1? Identify all possible cases and provide the circumstances under which each case happens. B. Suppose that both goods are normal goods. Consider two different tax schemes: an income tax and a sales tax levied only on good 1. Would the consumer prefer a 10% income tax to a 10% sales tax (assuming that the maximum amount of good 1 that the consumer can buy under each tax policy is approximately the same)? Why or why not? Explain your answer using a graph. Would the consumer prefer a 20% sales tax to a 10% income tax? Why or why not? Explain your answer using a graph. 3. Consider a consumer who buys insurance. The consumer will have an income of =100. She can consume all of her income in case of no accident, while she can consume $36 in case of accident. The probability of accident is 50%. At the price (premium) of , the consumer can buy an insurance in which she can get in case of accident. Let define 1 as the final consumption in case of accident and 2 in case of no accident. A. The consumer's utility from final consumption is ()=, where =1,2. Suppose that the consumer can buy an insurance with =64. What is the maximum amount the consumer is willing to pay for this insurance? Illustrate your answer using a graph. If the consumer's utility from final consumption is now ()=, what is the maximum amount the consumer is willing to pay for the insurance with =64? Compare to the case where ()=, does the consumer's willingness to pay for the insurance increase or decrease? Explain your answer. B. The consumer's utility from final consumption is ()=2. Suppose that an insurance company sells an insurance in which the company gets $4 profit. Would the consumer buy this insurance? If so, solve and for this insurance, and explain why the consumer buys such an insurance. Illustrate it using a graph.