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ECNS 301 Hotnewirk #: 3 Applications of Consumer Demand 8. Consider John Does utility function: U = zy, where is packs of cigarettes and y is dollars spent on all other goods. John has income m 32, the price of cigarettes (x) is P 1 and the price of all other goods (v) is P, 2 (a) What is the optimal consumption bundle and what level of utility is achieved? (b) Assume that the supply of cigarettes is perfectly elastic. The government imposes a tax of $1 per pack on cigarettes. What will be the after-tax price paid by Joe to consume a pack of cigarettes? (c) What will the new optimal consumption bundle be with the tax and what is Joes level of utility? (d) How much revenue will the government raise with the tax?

b-d

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rny 2P 3 2 20) 2 3 22 doveret t revenye

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