Answer BOTH questions in this section
You are advised not to spend more than
60 minutes on this section of the exam.
a. Explain how a consumer who purchases goods x1 and x2 determines the budget set that they operate with. The prices for these goods are Px1=£3 and Px2=£5, and income is m=£150. Draw the budget set in a diagram, labelling accordingly slope and intercepts. (5 marks)
b. Explain how the indifference curves of a consumer who considers goods x1 and x2 to be perfect substitutes one-for-one look like. Draw three indifference curves, adding to these a label indicating the utility of each indifference curve. You can use numbers of your choice (e.g. 1, 2, 3, 4, 5,… etc) to do this. Indicate what is the direction of greater preference. (5 marks)
c. Explain how the consumer facing the budget constraint from question a and the indifference curves from question b chooses what bundle to consume. Show this in a diagram. (5 marks)
d. Explain what would happen to the choice made in question c if the price of good x1 would increase to Px1=£6. Using the Slutsky substitution and income effect, explain the change from the choice made in question c to the new choice. Show your answer in a diagram. (10 marks)
Beef Production and Consumption: Consider the market for beef in country A, which is characterized by many consumers and many firms. The latter compete with one another and face different cost functions. At the same time, a lot of people love a steak, and you might find consumer willing to pay a lot of money for it. For simplicity, let us refer to the market for the same cut of beef, so that this is a homogenous product. Moreover, let’s assume that each farm both breeds and slaughters the animals.
1) Analyse the comparative statics of the following events using well-labelled diagrams that shows both the supply and demand curve for beef. Make sure you comment on why you believe a curve moves in a particular way and describe the effects on price and quantities: (8 marks)
a) The summer has arrived and more people meet for barbecues.
b) Price cap on each kilo of beef.
c) A documentary about the negative effects of beef production and consumption (for health and environment) goes viral. At the same time, a new grain has been found to increase the animals’ bulk.
d) A new and more efficient farming technology for fresh vegetables is widely employed.
2) Following the recent scientific evidence on the carbon footprint of beef production and adverse health’s effects of its consumption, describe which one between a per-kilo tax on production or on consumption (same amount of tax) leads to the largest reduction in the quantity of beef being exchanged. Comment on who bares most of the burden of the tax in each scenario and the effect on consumer and producers’ surplus as well as public finance. Support your arguments with the use of a diagram. (6 marks)
3) Suppose you are one of the many farmers producing beef. With the use of diagram, Discuss your short-run response to an increase in awareness of the adverse health/environmental effects of beef consumption/production. Support your argument with diagrams. (6 marks)
4) After a few years, there is only one big farm producing beef, with the government allowing beef-farming under a license system. Discuss the effects in terms of welfare, supporting your statements with the use of a diagram (5 marks).
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