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Minspendshermonthlyincomeof$1000betweenothergoodspricedat$1perunitanddoughnuts priced at $4 per unit. Min has usually shaped preferences and she is currently happy consuming 120 doughnuts a month. Inorderto alter the consumption

Minspendshermonthlyincomeof$1000between"othergoods"pricedat$1perunitanddoughnuts priced at $4 per unit. Min has usually shaped preferences and she is currently happy consuming 120 doughnuts a month.

Inorderto alter the consumption of sugary foods, the government decides to impose a tax on the purchase of doughnuts. As a result, the post-tax doughnut price is $6 per unit.

a. Diagrammaticallyshow Min's pre-tax budget constraint and her initial optimal bundle. Explain your work.

b. Reproduce your diagram for part (a) and work further on it to show howtheintroductionofthe taximpacts Min's budget constraint. Explain.

c. Now reproduce your diagram for part (b) and do further work on it to show how the introduction of the tax might change Min's optimal bundle. Make sure to show and explain all the details including income and/or substitution effects (depending on whether they are relevant). Also clarify the relevant preference assumptions you make to arrive at Min's new optimal bundle.

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