Effects income tax and excise tax have on consumer utility
Course:- Microeconomics
Reference No.:- EM13700099

Assignment Help
Assignment Help >> Microeconomics

Consider the utility-maximizing model in a two-good world, where our representative consumer has well-behaved preferences that result in smooth indifference curves that are convex to the origin. Place good one on the horizontal axis. (Assume I=$120 and P1=$3 and P2=$4 a. Illustrate utility maximization where the consumer purchases positive quantities of both goods. b. Show the effect a $2 excise tax levied on good one has on the consumer’s utility-maximizing bundle (assume the $2 tax results in a $2 increase in price). c. Assume consumers purchase 10 units of good one with the $2 excise tax. Rather than imposing the excise tax, the government could levy a $20 income tax, and raise the same tax revenue. Compare the effects the income tax and the excise tax have on the consumer’s utility. Under which plan (excise or income tax) is utility higher? Provide a graph and explain your finding. d. Compare your answer in part c, with the case where goods one and two are perfect complements. Illustrate and explain your answer.

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Microeconomics) Materials
What is asymmetric information and how does it create problems both before and after the transaction - what are the determinants of asset demand? What is the relationship bet
Using the compounding annual interest rate from above, what is the nominal, period interest rate and corresponding effective interest rate if compounding is hourly? Assume 3
The US goverment offers significant per-unit subsiy payments to US sugar growers. Describe the effects of the introduction of such subsidies on the market of sugar and the mar
Intermediate Microeconomics - ONLY 2 QUESTIONS IN ONE HOUR1.Suppose the demand and supply for milk in the European Union (EU) is given byp = 126 - 0.4Qd and p = 6 + 0.1Qs,
Assume that your consumption decisions are made according to the permanent income theory. Which of the following would lead to the largest increase in current consumption?
What is the opportunity cost of producing one more apple for Bill - find the equation for the line with the same slope as the one in part a, but having a y-intercept that is
Classical economists assumed that wage rates, prices, and interest rates were flexible and would adjust quickly. Consider an extreme case: Suppose classical economists belie
On a diagram, draw the marginal cost curves for the two factories, the average and marginal revenue curves, and the total marginal cost curve (i.e., the marginal cost of produ