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Compute the pre- and post-tax optimal bundle. Then decompose the change in cigarette consumption into income and substitution effects.

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Intermediate Microeconomics Academic Set 6: Intertemporal Choice and Competitive Equilibrium (Due 11/06) Exercise 1 (20 pts) There are two goods in this economy, Cigarettes and “all other goods,” sold at a per unit price of pc and po = $1. Consider a representative consumer with CobbDouglas preferences u(xc, xo) = x 1/3 c x 2/3 o […]

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