business economics hw

4.(9N4.8) The lump sum principle discussed in class applies when the government transfers money to people just like it does when they tax people. This problem examines such a situation. A. Use an indifference curve graph to show that an income grant to a person provides more utility than does a subsidy (the government pays part of the price) on good x that costs the same amount to the government. [Hint: a similar graph for taxes is found in Nicholson (9th ed.) p. 107] B. Given a Cobb Douglas expenditure function E(P , P ,U.)=2P/P/U. . Let Px=1 and P.=4. Calculate the extra purchasing power it would take to raise the consumer's utility from U-2 to U=3 with prices constant. C. How much of a price subsidy to good x would be required to raise the consumers utility from U=2 to U=3 while keeping the consumers expenditures constant. D. Given what we know about the lump sum principle, how does the cost of a flat income subsidy compare to the costs of an utility equivalent price subsidy to x