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ECONOMICS

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 ;

detail. ;

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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“FIRST15”

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