1. Hilary enjoys eating mufns (x) and drinking coffee (y). The price of a muffin is $2 and a cup of coffee is $1. Hilary has $500 to spend each year on mufns and coffee. a) Illustrate Hilary's budget set. What is the opportunity cost of muffins? The government would like to raise revenues. Mayor Bloomer recommends charging a xed fee for purchasing muffins. He proposes to "license\" the purchase of muffins. In order to purchase a muffin under Mayor Bloomer's scheme Hilary would have to purchase a (yearly) license at a cost of 550. b) In your diagram illustrate the effect of the proposal on Hilary's budget set. Suppose that under the licensing scheme Hilary buys 100 muffins and 250 cups of coffee. c) In your diagram illustrate an indifference curve for Hilary through the bundle (100,250). What is her MRS at (100,250)? In your diagram assume that the two goods are NOT perfect complements. Councilman Williams thinks that the government should place a tax on muffin purchases and not issue licenses. Councilman Williams proposes a $0.50 per muffin tax (and no licensing fee) in order to raise the $50 in revenues. d) Illustrate the budget line for Hilary if the $0.50 tax is placed on mufns (and there is no licensing fee) in your diagram for part (a). Is the bundle (100,250) affordable under this tax plan? e) Would Hilary consume (100,250) under the per unit tax scheme? Briefly explain your answer. You must refer to her MRS to receive full credit. f) At the best bundle on the budget line associated with the $0.50 per unit tax would the government raise $50 in revenues? Briefly explain your