Question1. You are a commuter student at local university. Because of the steep ascend in gasoline prices, your parents decide to give you adequate additional weekly cash so that you can afford the higher transportation expenses with no having to reduce your spending on anything else.
True or False, elucidate (using indifference curve analysis): Because of your parents’ generosity, your standard of living, that is, welfare will be unaffected by the increase in gasoline prices. (HINT: Think of the additional cash from your parents as a “cost-of-living adjustment”.)
Question2. Using a graph of the compensated and uncompensated demand curves, show how the magnitudes of the CV, EV, and CS will be related to each other when there is a ceteris paribus increase in the price of an inferior good.
Question3.
a. Usually, there will be a difference between the CV and the EV. Why?
b. The change in consumer surplus (CS) is not “theoretically” justifiable like the CV and EV but it continues to be the most widely used measure of consumer welfare change. Explain how this can be reconciled.
Question4. Use standard indifference curve analysis to show whether the following statement is true or false.
If the aim of government welfare programs is to offer lower income households with a specific minimum level of economic well-being, then it will be cheaper to do so throughout a system of pure cash transfers than through a system of price subsidies.
Question5. Carmen, the Queen of Electra, is concerned over what she thinks is an excessive consumption of electricity. Therefore, she proposes an excise tax onto electricity consumption which, if implemented, would add $500 per year to the taxes of the average Electran household. An advisor to the Queen warns of a consumer backlash and recommends the following amendment give the $500 back in the form of a tax rebate. The Queen thinks this is the dumbest idea she’s ever heard. She reasons that such a plan would do nothing to reduce electricity consumption because the plan would take away $500 with one hand, but give it back with the other.
Do you agree with the Queen or not? Fully elucidate your answer using standard indifference curve analysis.