Q1

IN HIS 2019 BUDGET ADDRESS DELIVERED TO THE NATIONAL ASSEMBLY IN OCTOBER 2018, THE MINISTER OF FINANCE MADE THE FOLLOWING STATEMENT.

"Mr speaker sir, as a demonstration of my governments commitment to increasing our peoples income levels, I propose to increase the current excempt threshold of pay as you earn by more than 36 percent from K2,200 to K3000 per month"

This means an individual in 2018 who earned K2, 200 per month or below was subject to 0% tax and an individual who earned from K2, 201 to K3000 per month was subject to 25% pay as you earn tax. But now in the current 2019 PAYE regime, an individual who earns K3000 per month or below is subject to 0% tax.

Suppose Joans gross monthly income has remained the same from 2018 to 2019 at k3000. She consumes two goods only food and clothing. Her utility function is given by U= C^0.5 F^0.5. The price of clothing has been at k50 per unit and the price of food has been at k100 per unit.

(Show all your word clearly and label your graphs completely)

a) Use the langrange to derive Joans demand functions for food and clothing.

b) For the year 2018, graphically present joans budget line.

c) For the year 2018,calculate and graphically present joans optimal choice of clothing and food, Show her optimal level of utility

d) After the adjustment in pay as you earn, show by calculating and graphing how Joan's budget line is affected, as well as her optimal choice of the two goods consumed and optimal utility.

e) Comparing the two optimal bundles and utility levels under the two tax regimes, comment on how the government new tax regime is affected by the wellbeing of joans as measured by changes in consumption and utility.