Question
c. Now we will consider optimization and tax policy. Assuming Daryl has the above utility function and faces the following prices and income: 1=1,2=1,=8. c.i.
c. Now we will consider optimization and tax policy. Assuming Daryl has the above utility function and faces the following prices and income: 1=1,2=1,=8. c.i. Solve for Daryl's optimal bundle. d. Instead, Assume Daryl has the same utility function as above but faces the following prices and income: 1=1,2=1,=30. cii. Does he prefer a lump sum tax of 1 dollar, or a per unit tax that raises the same level of revenue or is he indifferent between the two? Explain in a sentence using what you know about tax theory d.i. Solve for Daryl's optimal bundle. What type of preferences does Daryl have that ensures this must be the optimal bundle in this case? dii. Now imagine the government has a choice between a lump sum tax of 1 dollar, or a one dollar unit tax on good 1. Show the substitution effects from the unit tax on good 1. Given this result, why might your answer to the question in c.ii. be different at this higher level of income?