Using Figure 7.9 as a starting point, suppose the consumer chooses point e (spend $13 now) and point d (save $7). Suppose the government imposes a 20 percent tax on spending (consumption now), meaning that for every dollar spent now, $0.20 goes to the government, leaving only $0.80 to purchase products.

Figure 7.9

a. Use a graph to show the effect of the consumption tax on the relevant curves.

b. On your graph, show, for the initial bundle ($13, $7), the tax-induced gap between the marginal utility per dollar on spending and the marginal utility per dollar of saving.

c. Which direction will the consumer go—more spending or more saving?

Transcribed Image Text:

Utils 26 14 MU per $ 13 19 Spending: consumption now Utils 38-c 26 14 MU per $: Counter- act present bias d MU per $: Present bias 7 Saving