1 Assume a household's budget is $10, the price of palm oil is $1 and the price of

cheese is $2:

i. Draw the household's budget line on the diagram below. If they were to buy only one good or the other, how many total liters of oil could they buy? How many units of cheese?

ii. Indicate the point where the household will consume. How many liters of palm oil? How much of cheese? Label this Point as E.

iii. Assume the government was to tax palm oil consumption by $1, draw the new budget line on the graph.

iv. Redraw the households original budget line on the diagram, and draw a new budget line where the price of palm oil has doubled.

v. Is the household better off or worse off as a result of the tax? How do you explain?

2 Under the demand and supply analysis, let us assume that the price of Hard wood is $50 per unit. Now the government has imposed 5 % tax to the seller which increased the cost of production. Explain the following with the help of diagram.

i.Do the cost of production affects Demand and Supply? (explain with the reference of necessities and

Non-essential goods)

ii. Will there be a shift or movement along the supply curve? (explain with the reference of necessities

and non-essential goods)

iii.In order to maintain the same profit as before imposition of tax, how much price the seller should

increase presuming that the a) demand for the product is perfectly inelastic and

b) demand of the product is perfectly elastic

iv. What are the determinants of demand and supply of any product.