You are working as a policy advisor for the small island nation of Economica. There are 100 households on the island.

You are working as a policy advisor for the small island nation of Economica. There are 100 households on the island. Consumers consistently spend about (1/4) of their income on fish (f) and the remaining money on the composite good (g) (implying Cobb-Douglas preferences). Each person earns the same income bar{m} = 100 assigned by the government. For each problem, we are reverting back to the original set up unless otherwise stated. Many of the problems won't have whole number solutions, so assume that fish are divisible.

(a) Find the aggregate demand curve for fish and the inverse demand curve.

(b) Suppose the current price for fish is $1 and . The government is considering leases for offshore drilling. The offshore drilling will double the cost of fish and the proceeds will be distributed to the citizens. What is the minimum amount the government has to charge the drilling company for its citizens to remain at the same utility level? (This is a compensating variation problem.)

(c) A single firm has 100% of the fish market. They have informed the government that they will be raising fish prices from $1 to $2 unless they receive a tax break. The tax break will come by directly lowering the government supplied income. What is the most the government could give as a tax rate and citizens still be better off than the price increase? (This is an equivalent variation problem.)

(d) Suppose the market supply curve is Qs = 2500pf . What is the equilibrium price and quantity?

(e) We know from principles that relative elasticities determine the incidence of a per item tax. Show that at the current price and quantity, the tax incidence would be split evenly.