2004 water subsidy

Posted by tim on Jun 02, 2012; 5:11pm
URL: http://discussion-forum.276.s1.nabble.com/2004-water-subsidy-tp7577442.html

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