The Pullman Company has a lot of pull in the town of Pullman. Everybody in town is identical, and they all work for the company, which pays them each $10 a day. Their favorite food is apples, which they get from a mail-order catalog for $1 apiece.
a. Draw the typical resident's budget line between apples and all other goods, with all other goods measured in dollars.
b. Pullman has decided to institute a sales tax of $1 per apple. But to prevent dissatisfied workers from leaving town, Pullman must simultaneously raise wages so that workers are just as happy as before. Draw the typical resident's new budget line, given both the sales tax and the wage increase.
c. Use your graph to illustrate Pullman's new net expense per worker (that is, wages paid minus sales tax collected).
d. Was Pullman wise to institute the tax?