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Question 1

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Assume that there are two categories of goods: protein shakes and all other products. 

A. Show using diagrams how a consumer’s demand curve for protein shakes can be derived from 

an indifference map and a budget constraint diagram. Make sure you explain your answer in 


B. Using a different set of diagram/s deconstruct the price effect into the substitution effect and 

the income effect. Take note to define each effect.

Question 2


Assume the production of coal involves the generation of a negative externality. 

i. Explain how the equilibrium level of output would be determined in the market for coal, 

assuming no attempt is made to internalise the externality. Is that equilibrium efficient? 

Use a diagram(s) as part of your explanation. 

ii. What is a Pigovian Tax? Explain how the imposition of a Pigovian Tax could alter the 

equilibrium in this market. How does the tax impact on the efficiency of this market? Use 

a diagram(s) as part of your answer. You are free to augment the diagram you used in (a) 

in your answer to (b). 

iii. What other solutions could be used to remedy this negative externality? You do not need 

to describe these remedies in detail.

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