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

cheese is $2:

1.Draw the household's budget line. 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?

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

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

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

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