2004 water subsidy

[tim]

consider a person who consumes water and bread, U=xy, x=amt of water and y=amt of bread. suppose the income of the person is 10, price of bread is 3 and water is 1.the price of water incorporates a per unit subsidy of re 1, i.e. for every unit of water th person pays re 1 to water supplier and the govt pays re 1 to water supplier. suppose the person's demand is (xo, yo).


Q. if the govvt provides this person a lump sum income subsidy that exactly  offsets her utility loss on a/c of removal of the water subsidy, then the required lump sum subsidy is ?
1. 9/4
2.5/3
3.under root 200-10

Q. the income effect of the removal of the water subsidy is
1.(10+under root200)/4 , (10+under root200)/6
2.(10-under root200)/4 , (10-under root200)/6
3.(-1/2,-1/3)
4.(5-under root200)/4 , (15-under root200)/6

[Chocolate Frog]

For the first part, you could use the fact that for Cobb-Douglas preferences, (indirect) utility is given by (I^2)/4pxpy, and solve for I that affords our consumer her original level of utility at new prices. You should get (200)^1/2.

For the second part, you know the total effect of the removal of water subsidy and you also know the substitution effect. Just subtract the latter from the former and you should get option (2) as your answer.

[tim]

thnk u chocolate frog. :)

[tim]

also cn u temme from whr cn i do hicksian price effect for better understanding ...

[Chocolate Frog]

I never ventured beyond Varian myself, so I may not be the best person to answer that. Would someone else care to help?

[tim]

ok...thnk u for replying...

[tim]

cn u pls help me wid this questn as well...if u dnt mind...
q6 of this link...
http://economicsentrance.weebly.com/uploads/1/1/0/5/1105777/option-a-2010.pdf

[Chocolate Frog]

Sorry, I'm not sure about how to do this question. What I do know is that "~" is not transitive, which effectively rules out every other option but (a). Please be advised to not employ such "tricks" without clever reasoning.

[tim]

ok..thnk u :)