John buys shoes for $1 a pair and socks for $1 a pair. His annual income is $20.
a. Now suppose the government institutes two new programs: First, it taxes shoes, so that shoes now cost John $2 a pair. Second, it gives John an annual cash gift of $10. Draw his new budget line.
b. Suppose that with the new programs in place, John chooses to buy 10 pairs of socks and 10 pairs of shoes. Has the pair of government programs made him better off, worse off, or neither?