Assignment: Microeconomic Theory

A. Read the article about Greeley Colorado (Article- Greeley restaurants thrive as consumers spend nearly half their food budgets on dining out by Katarina Velazquez.) through the lens of the application of budget constraints (income) to purchase of goods and services.

1. What is the trend noted in the article?

2. What is the rationale provided for the trend?

3. What does the rationale provided suggest with respect to the value of time?

4. In looking at the data for Greeley: Greeley, Colorado (CO) income map, earnings map, and wages data is income a basis for the trend? If so, how much has income increased in the period relative to the proportionate increase in the trend?

5. Draw an indifference map of the two options and include changes in income over the period. Provide both a graphical depiction of preferences and note whether the goods are normal or inferior.

6. Returning to question 3, craft a budget constraint for time with the two uses of time being labor and leisure. Graph this along with an indifference curve. Based on the article's rationale, what would the indifference map reveal about preference between the two uses of time over the interval?

7. Based on 6, the preference change can be attributed to a potential change in the "price" or value of time. If this is the case, assuming utility has remained constant, how has the time (budget) constraint changed? Graph this.

B. Read the description in the link provided to gain an understanding of a carbon tax: Article- What's a carbon tax?

The impact of a carbon tax, according to a 2013 report by the Congressional Budget Office would be the following:

How Would a Carbon Tax Directly Affect the Economy?

By raising the cost of using fossil fuels, a carbon tax would tend to increase the cost of producing goods and services-especially things, such as electricity or transportation, that involve relatively large amounts of CO2 emissions. Those cost increases would provide an incentive for companies to manufacture their products in ways that resulted in fewer CO2 emissions. Higher production costs would also lead to higher prices for emission-intensive goods and services, which would encourage households to use less of them and more of other goods and services.

Without accounting for how the revenues from a carbon tax would be used, such a tax would have a negative effect on the economy. The higher prices it caused would diminish the purchasing power of people's earnings, effectively reducing their real (inflation-adjusted) wages. Lower real wages would have the net effect of reducing the amount that people worked, thus decreasing the overall supply of labor. Investment would also decline, further reducing the economy's total output.

The costs of a carbon tax would not be evenly distributed among U.S. households. For example, the additional costs from higher prices would consume a greater share of income for low-income households than for higher-income households, because low-income households generally spend a larger percentage of their income on emission-intensive goods. Similarly, workers and investors in emission-intensive industries, who would see the largest decrease in demand for their products, would be likely to bear relatively large burdens as the economy adjusted to the tax. Finally, areas of the country where electricity is produced from coal-the most emission-intensive fossil fuel per unit of energy generated-would tend to experience larger increases in electricity prices than other areas would.

1. Based on the information provided, what is the income line (budget constraint) after the implementation of a carbon tax?

2. Assuming no change in preferences, draw the indifference curve map and include the before and after carbon tax implementation income line (budget constraint).

3. How does the tax impact utility?

4. There is concern that a carbon tax could be significantly regressive (disproportionately impact lower income earners relative to higher income earning counterparts). Explain why this would be the case.

5. How could a redistribution of the tax revenue counter the disproportionate nature of the tax?

6. The carbon tax in essence places a cost on creating carbon emissions, looking at substitutes to carbon-based energy, would you anticipate that the tax would promote substitution? Provide a justification and explanation for your answer.

7. In cap and trade programs, there is an argument that only the prices of electricity are impacted. Emissions are allowed to a threshold and emitters can either buy permits to pollute from lower emitters or invest in technology to reduce emissions. Additionally, since there is a threshold for acceptable emissions, cap and trade is not looked upon favorably as there is limited incentive to invest in emissions reducing technology if the pollution permits are not priced high enough. Based on the description provided, how would the income (budget) constraint be different in a cap and trade scheme?

8. Using the information provided in 7, graphically depict the impact of a cap and trade impact on an individuals budget constraint and indifference map.

9. Based on your graph in 8, how is utility impacted, assuming no change in preferences.

C. Whether preferences are related to reflex consumption or marketed demand, consumers do reveal their preferences for specific goods on a daily basis. The limited information from which consumers make decisions may be attributed to asymmetric information or simple delegation of responsibility for consumption to market mechanics as well as assumptions related to the alignment of incentives between producers, consumers and regulatory bodies. Regardless and focusing on observation, plastic water bottle use is significant (read: A million bottles a minute: world's plastic binge 'as dangerous as climate change'). In the U.S., drinking water is regulated by the EPA, while the FDA has jurisdiction over bottled water. Arguably, the EPA's reach is more significant, yet bottled water continues to have significant growth in sales.

1. Based on the articles and the information provided, how would graph the revealed preference for tap water compared to bottled water? Justify, graph and explain your answer.

2. Given what you have read, do you believe the revealed preference you described is consistent with the optimization and equilibrium principle? If so, why and if not why?

3. How would greater information related to the environmental and health impact of plastic affect your answer in 2?

4. In class, we discussed the implied relationship between price and marginal utility. Derive this relationship and explain it. You may include graphs but must address the equational equalities.

5. How does information impact utility in this question-following on your answer in 3? What does this imply about price? Explain.

Attachment:- Microeconomic-Theory-Assignment.rar