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Dwnload Full Public Finance and Public Policy 5th Edition Gruber Solutions Manual PDF
Dwnload Full Public Finance and Public Policy 5th Edition Gruber Solutions Manual PDF
Dwnload Full Public Finance and Public Policy 5th Edition Gruber Solutions Manual PDF
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1. Assume that the price of a bus trip is $1, and the price of a gallon of gas is $2.50. What is
the relative price of a gallon of gas, in terms of bus trips? What happens when the price of a
bus trip rises to $1.25?
A commuter could exchange 2.5 bus trips for 1 gallon of gas (both will cost $2.50), so the relative price
of a gallon of gas is 2.5 bus trips. At $1.25 per bus trip, the relative price of a gallon of gas has dropped
to $2.50 ÷ $1.25 = 2 bus trips.
2. Draw the demand curve Q = 250 − 10P. Calculate the price elasticity of demand at prices of
$5, $10, and $15 to show how it changes as you move along this linear demand curve.
One way to sketch a linear demand function is to find the x (Q) and y (P) intercepts.
Q = 0 when P = $25. When P = 0, Q = 250.
Price elasticity is the percent change in the quantity purchased divided by the percent change in price. To
calculate these percentage changes, divide the change in each variable by its original value. Moving in $5
increments:
3. You have $100 to spend on food and clothing. The price of food is $4 and the price of clothing
is $10.
The food intercept (y in the accompanying figure) is 25 units. If you spend the entire
$100 on food, at $4 per unit you can afford to purchase 100/4 = 25 units. Similarly, the
clothing intercept (x) is 100/10 = 10. The slope, when food is graphed on the vertical axis,
will be −2.5, which is equal (in absolute value) to the ratio of the price of clothing to the price
of food (10/4).
b. Suppose that the government subsidizes clothing such that each unit of clothing is
half-price, up to the first 5 units of clothing. Graph your budget constraint in this
circumstance.
This budget constraint will have two different slopes. At quantities of clothing less than or equal
to 5, the slope will be −1.25 because the ratio of the price of clothing to the prices of food is
now 5/4. In other words, for less than 5 units of clothing, 1 unit of clothing costs the same as
1.25 units of food, instead of 2.5 units of food. At quantities of clothing greater than 5, the slope
will be −2.5 (if graphed with food on the y-axis), parallel to the budget constraint in shown in
part a. The point where the line kinks, (5, 18.75), is now feasible because $5(5) + $4(18.75) =
$100. The new x-intercept (clothing intercept) is 12.5: if you purchase 5 units at $5 per unit, you
are left with $75 to spend. If you spend the rest of it on clothing at $10 per unit, you can
purchase 7.5 units, for a total of 12.5 units.
CHAPTER 2 / Theoretical Tools of Public Finance
-3-
4. Use utility theory to explain why people ever leave all-you-can-eat buffets.
The theory of diminishing marginal utility predicts that the more people eat the less utility they gain from
each additional unit consumed. The marginal price of an additional unit of food at an all-you-can-eat
buffet is zero; rational consumers will eat only until their marginal utility gain from an additional bite is
exactly zero. The marginal cost of remaining at the buffet is the value of the time spent on the best
alternative activity. When the marginal benefit of that activity is greater than the marginal benefit of
remaining at the buffet, diners will leave.
5. Explain why a consumer’s optimal choice is the point at which her budget constraint is
tangent to an indifference curve.
Consumers optimize their choice when they are on the highest possible indifference curve given their
budget constraint. Suppose a consumer’s choice is feasible (on the budget constraint) but not at a
tangency, as at point A in the accompanying figure. Under these circumstances, the budget constraint
must pass through the indifference curve where it intersects the chosen point. There must then be at
least a segment of the budget constraint that lies above (up and to the right of) the indifference curve
associated with that choice. Any choice on that segment would yield higher utility. Only when no part
of the budget constraint lies above the indifference curve associated with a consumer’s choice are no
feasible improvements in utility possible. The single tangency point (C in the figure) is the only point
at which this occurs.
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MOST IMPORTANT INVENTION.
THE PATENT STUCCO PAINT CEMENT.—This truly valuable
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after having been subjected to the most rigid tests, is now offered
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Architects, Engineers, Contractors, Builders, Masons, Plasterers,
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One coat of the Cement, so prepared, is sufficient to cover at once
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Messrs. Johns and Co., of Plymouth (the Patentees), are now
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