The consumer’s utility function is U(x,y) = xy2 , where x denotes the quantity of good X that the consumer consumes and y denotes the quantity of good Y that the consumer consumes. The price per unit of good X is 2 euros and the price per unit of good Y is 40 euros. Consumer’s income is 240 euros.
a) Find the optimal quantity of good A and good B, for this consumer in given conditions (10 points)
b) Suppose that the Government is considering 2 alternative taxation schemes: – alternative 1: an excise tax of 2 euros per unit of good X – alternative 2: an income tax 25%, which applies with regard to consumer’s entire income If the consumer must choose one of the taxation schemes, then which of these taxation schemes should a rational consumer choose? Justify your answer and provide calculations for proof.
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