Problem 1
Originally the consumer faces the budget line \(p_{1} x_{1}+p_{2} x_{2}=m .\) Then the price of good 1 doubles, the price of good 2 becomes 8 times larger, and income becomes 4 times larger. Write down an equation for the new budget line in terms of the original prices and income.
Problem 2
What happens to the budget line if the price of good 2 increases, but the price of good 1 and income remain constant?
Problem 3
If the price of good 1 doubles and the price of good 2 triples, does the budget line become flatter or steeper?
Problem 4
What is the definition of a numeraire good?
Problem 5
Suppose that the government puts a tax of 15 cents a gallon on gasoline and then later decides to put a subsidy on gasoline at a rate of 7 cents a gallon. What net tax is this combination equivalent to?
Problem 6
Suppose that a budget equation is given by \(p_{1} x_{1}+p_{2} x_{2}=m .\) The government decides to impose a lump-sum tax of \(u,\) a quantity tax on \(\operatorname{good} 1\) of \(t,\) and a quantity subsidy on good 2 of \(s .\) What is the formula for the new budget line?
