Suppose that the government is raising money for funding lung cancer research by taxing cigarettes. If they raised the same amount by having a tax on income would individuals be better off or worse off? Illustrate your result by supposing that all individuals in this society share the same preferences as Mr. Vice, who consumes only cigarettes and alcohol, and whose preferences are represented by the utility function U(C,A)=lnC+lnA. All individuals have the same income, I. Denote by pC and pa, the before tax prices of cigarettes and alcohol, respectively. Finally suppose that the government needs to raise R dollars in revenue. Will your answer to question 9 change if we change the situation as follows? The people in the society had only one consumption good: cigarettes. They smoked and worked according to the preferences represented by the following utility function: U(C,L)=CL, where L are the hours of leisure and 24L are the hours worked. Denote by pc the before tax price of cigarettes, and by R the amount of revenue to be raised, as before. Denote by w the wage rate. If your answer changes, illustrate the change with the given example. If it does not change, show that result with the same example. Suppose that initially prices were px=py=1 and his income was 10 . Then, px increased to 5. What is the compensating variation, the equivalent variation, and the consumer's surplus? What if py also increased to 5 ; can we answer the same questions? What is the difficulty with consumer's surplus when two prices change? Suppose that the government is raising money for funding lung cancer research by taxing cigarettes. If they raised the same amount by having a tax on income would individuals be better off or worse off? Illustrate your result by supposing that all individuals in this society share the same preferences as Mr. Vice, who consumes only cigarettes and alcohol, and whose preferences are represented by the utility function U(C,A)=lnC+lnA. All individuals have the same income, I. Denote by pC and pa, the before tax prices of cigarettes and alcohol, respectively. Finally suppose that the government needs to raise R dollars in revenue. Will your answer to question 9 change if we change the situation as follows? The people in the society had only one consumption good: cigarettes. They smoked and worked according to the preferences represented by the following utility function: U(C,L)=CL, where L are the hours of leisure and 24L are the hours worked. Denote by pc the before tax price of cigarettes, and by R the amount of revenue to be raised, as before. Denote by w the wage rate. If your answer changes, illustrate the change with the given example. If it does not change, show that result with the same example. Suppose that initially prices were px=py=1 and his income was 10 . Then, px increased to 5. What is the compensating variation, the equivalent variation, and the consumer's surplus? What if py also increased to 5 ; can we answer the same questions? What is the difficulty with consumer's surplus when two prices change
