Consider two consumers Anton and Barbara who each have an income of $30 to spend on chocolate
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 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.
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba