A Question per day - Day 4

1. A consumer purchases varying amounts of two different goods, apples and bananas. Let's assume that the marginal rate of substitution associated with these goods is -0.5 (assuming bananas are on the vertical axis of the indifference curve graph). Bananas are $1 per unit, and so are apples. Would this consumer prefer a $10 check (i.e. increase in income) over a voucher good for 10 free units of apples? Explain.

2. Suppose local government passes legislation that transforms a major highway into a toll road. The toll road raises the cost of transportation into the city and, unfortunately, affects a large number of people living outside the city who use this highway to access their weekly place of worship (feel free to substitute church, synagogue, mosque, pagan alter of sacrifice, or even wikkiup for place of worship in this problem).

When the “price” of attending weekly worship services increases, many citizens decrease their “consumption” of worship. Always sensitive to the needs of their constituents, let’s assume that local government responds to this situation by compensating these citizens. All affected members of local places of worship will receive a regular check that’s just large enough to allow these citizens to return to their original attendance patterns.

We can set this problem up with a few assumptions. First, we’ll assume that worship is a good that consumers can effectively purchase if they’re willing to pay the existing “price”. Second, we’ll assume in this case that the toll is like a tax on worship. Lastly, let’s assume that the typical citizen consumes varying quantities of worship and a composite good called “all other goods”, that these goods are not particularly close substitutes, and that all citizens attempt to maximize their utility.

When these citizens are compensated for the higher price of attending their respective places of worship, enough to allow them to return to their original “quantity purchased”, you’d think they’d be indifferent between their final situation (after receiving the check) and their initial one (before the toll road). Use indifference curve analysis to show whether they should be indifferent or not.