Assume consumers have the choice between soda and bottled water. Suppose the government raises the price...
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Assume consumers have the choice between soda and bottled water. Suppose the government raises the price of soda through a tax. Question 9 (5 points) Use a graph to demonstrate how the consumer adjusts his/her optimal choice after the tax. Clearly label the initial optimal choice (i.e., prior to the tax) and the new optimal choice (i.e., after the tax). Under what scenario would the consumer end up purchasing more soda after the tax? [HINT: First, determine if the substitution effect is positive or negative. Then, determine what conditions on the income effect must hold] Assume consumers have the choice between soda and bottled water. Suppose the government raises the price of soda through a tax. Question 9 (5 points) Use a graph to demonstrate how the consumer adjusts his/her optimal choice after the tax. Clearly label the initial optimal choice (i.e., prior to the tax) and the new optimal choice (i.e., after the tax). Under what scenario would the consumer end up purchasing more soda after the tax? [HINT: First, determine if the substitution effect is positive or negative. Then, determine what conditions on the income effect must hold]
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Answer rating: 100% (QA)
Treotled AWaler a X2 PA Sada x Xg A re tax budget lme x Soda Y BWJ AC post tax Mor... View the full answer
Related Book For
Macroeconomics
ISBN: 978-1464168505
5th Canadian Edition
Authors: N. Gregory Mankiw, William M. Scarth
Posted Date:
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