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Think about the budget line given by 10X + 8Y 640. Draw this budget line. How will the budget line move if the government now
Think about the budget line given by 10X + 8Y 640. Draw this budget line. How will the budget line move if the government now imposes 10% sales tax on both commodities? Draw the new budget line with taxes imposed. (i) How will the budget line move if the government decided to impose a 10% income tax instead of a sales tax? (ii) Which policy (10% sales tax and no income tax vs. 10% income tax and no sales tax) leaves the consumer with more purchasing power? (A graphical argument is sufficient.)
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