Applied Microeconomic Theory I Final Exam October 29, 2022 2 Question 3. [Lump Sum Principle] Suppose we use fixed proportions utility function with their optimal quantity choices as below. utility = (,)=min (,2), = +0.5 = 2 + a) (5 points) Suppose =$1, =$2 and (=)=$10. Calculate the indirect utility in this case. b) (5 points) Now a tax of $1 is levied on good x. Calculate the indirect utility after tax, and the tax collection amount. c) (5 points) Show that the lump sum income tax of the same tax collection amount from b) leaves the utility level the same as in b). d) (5 points) Explain why the after-tax utility is the same under both the excise tax and the lump sum income tax in this utility function case. Question 4. [Costs - Short Run vs Long Run] Following is a firm's production function for soccer balls: =1, where 1 is the fixed amount of (capital equipment) in the short run, and is the amount of labor. a) (10 points) Calculate the firm's short-run total costs as a function of ,, and 1 (where = unit capital price; = unit labor price) b) (10 points) Given ,, and , how should the capital stock be chosen to minimize short-run total cost? c) (5 points) Using your answer from b) above, calculate the long-run total cost of soccer ball production. d) (5 points) For =$1, =$4, and 1=100, at what level of is short-run cost function tangent to the long-run cost function?