Question
5. A consumer's utility only depends on the consumption of goods A and B according to the following Cobb-Douglass utility function: U(A,B) = A1/4 B
5. A consumer's utility only depends on the consumption of goods A and B according to the following Cobb-Douglass utility function: U(A,B) = A1/4 B 3/4. The price of goods A and B are $5 and $10, respectively. The consumer has a budget of $800 that he can use to consume the two goods. a. Write down the budget constraint and plot it. b. Calculate the optimal bundle and maximized utility for the consumer. c. Calculate the utility loss due to a $2 tax on good B d. Show that the consumer would prefer a revenue equivalent income tax instead of the tax on good B.
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