Question
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.
I have the answer I just want to see if it matches.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started