Question
Consider two consumers Anton and Barbara who each have an income of $30 to spend on chocolate bars (x1) and all other goods (x2). The
Consider two consumers Anton and Barbara who each have an income of $30 to spend on chocolate bars (x1) and all other goods (x2). The price of a chocolate bar (pre-tax) is $1.50, and the price of all other goods is normalized to $1. However, each person's preferences differ, as follows:
Anton loves chocolate and only ever spends his money on chocolate bars, so UA = x1
Barbara thinks chocolate bars are perfect complements with all other goods, so UB = min{x1, x2} Suppose the government puts a $0.50 tax on chocolate bars. For each person: Find their choices before and after tax. Show these on separate indifference curve/ budget line diagrams. Find the tax each person pays, and show that there is no excess burden from the tax on either person. Why is this? Explain.
Step by Step Solution
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Step: 1
Lets break down each step for both Anton and Barbara 1 Antons Choices Before Tax Budget line equation 150x1 1x2 30 Since Anton only spends on chocolat...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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