Job is a smoker. He has a utility function for cigarettes smoked ...

[Jipu 123]

Job is a smoker. He has a utility function for cigarettes smoked in bars (q1 ) and a composite good (q2 ) given by U(q1,q2 ) = 10q1.5 + q2 Job's income is 100 and faces prices p1 = 5 and p2 = 1. The government is planning to ban smoking in bars.
 
  Compute the compensating variation.

Question 2

The government prefers an ad valorem tax to a specific tax that reduces the monopoly output by the same amount because
 
  A) consumers are not harmed by the ad valorem tax.
  B) the monopoly prefers the ad valorem tax.
  C) consumers prefer the ad valorem tax.
  D) the ad valorem tax transfers more revenue from the monopoly to the government.

[akudia]

Answer to Question 1

Find the utility before the smoking ban. Set MRS = MRT (or use Lagrangian method) to compute the optimal bundle. Solving yields q1 = 1 and q2 = 95. The utility = 105. To reach the same utility when q1 = 0, the consumer would need an additional 5 of income, i.e., CV = 5.

Answer to Question 2

D