Question: Consider a consumer with strictly monotonic, strictly convex, and continuous preferences over two commodities: telephone calls and other goods. Suppose that currently the consumer has

Consider a consumer with strictly monotonic, strictly convex, and continuous preferences over two commodities: telephone calls and other goods. Suppose that currently the consumer has to pay an excise tax t on each telephone call. Let his current consumption bundle be (x1, x2) so that his total tax equals tx1(good 1 is telephone calls and good 2 is other goods). Show that if the tax were removed and he had to pay a one-time fee equal to T = tx1 instead (the same amount but as a lump sum), then he would be better off.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!