1. Supply and Demand: a. If you were self interested politician who want to tax consumers more than sellers (because you receive hefty donations from the latter) on which of the following two goods would you levy a sales tax: bread vs rental rooms. Why? b. Suppose the supply of and demand for eggs is given by = 2 + 3 and = 10 . What is the proportion of the burden of tax on sellers of $2 per unit tax imposed on buyers?

2. Say True, False or uncertain and briefly explain why. You can use a supporting formula and/or graph. In most cases, a short explanation will do. Points will be given only for the supporting explanations you provide. (20 pts.) a. "If a rational consumer spends his entire income on two goods, then at least one of them must be an inferior good.' ' b. "If price of a good increases, other things equal, and the total revenue of sellers of the good goes up, then the good has elastic price elasticity of demand in that price range.' ' c. "A utility maximizing consumer will always choose a bundle at which her indifference curve is tangent to her budget line.' ' d. "If preferences of all consumers are convex but not the same (no corner solution and no kinked indifference curves) and they face the same prices for all goods, then at their optimal bundle of consumption, all consumers must have the same MRS. e. A linear demand function has constant price elasticity of demand at each price.

3. Use the appropriate diagram to answer the following questions (15 pts.)} a. Assuming that fast food is a giffen good, show how the substitution and income effects of a price decrease look like. Put fast food on the horizontal axis and all other goods on the vertical axis. b. Show graphically that a lumpsum subsidy of T imposed on a worker is likely to make the worker work less hours.

4. Calculation Question. Please show all your work.(30 pts.) Germano Nati has allotted $1,000 to spend every year on lattes (L) and cake(K). The price of latte is = $50 per cup and the price of cake is = $25 per slice. Nati's preferences can be represented by the following utility function: (, ) = 2 + () + () where = 1/ and = 1/ a. Give the formula for Nati's budget line, and draw it on a separate sheet provided. Put lattes on the x-axis and cake on the y-axis. 2 b. What combination of latte and cake maximizes Nati's utility? That is, solve for L* and K*. Draw this point on the same graph, and label it A. Also calculate the utility, 1 , associated with this optimal point. The price of a cake rises to = $50. c. What combination of latte and cake does Nati now choose? That is, solve for and . Draw this point on the above graph, and label it B. Please show all your work. d. How large should Nati's income need to be so that with the new set of prices, Nati could afford his old consumption bundle? Given this income, what is the new optimal bundle for him. Draw the budget line and the optimal points as and . e. Calculate the change in consumption of cake due to substitution effect () and income effect ().