Question

Figure 11.11 shows that a tax on clothing can reduce the price of food. Suppose that after the tax on clothing consumption is imposed, another tax is levied on the consumption of food. For example, the consumption of both commodities could be subject to a tax of five percent. Show how the conclusions of the analysis in the text are modified when the same tax is present in both markets. Analyze the incidence of the tax.
In your answer, assume that the tax revenue is returned in equal lump-sum transfers to all citizens.


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  • CreatedAugust 22, 2015
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