Indierent between alcohol and cigarettes

Reference no: EM13176144

Assume that every citizen of country X has the utility function of u(x, y) = 5x+4y. Say that x denotes cigarettes and y denotes alcohol. The government of country X receives revenue from alcohol and cigarrete purchases but wants to curb alcohol consumption without decreasing its total revenue. Assuming that the government can levy a per unit tax on alcohol consumption, and taking initial prices and income to be px = 1; py = 1=2; I = 100, what is the minimal tax rate that will reduce alcohol consumption by at least 10 percent (without decreasing total revenue)? Make the convention that whenever prices are such that the consumer is

indierent between alcohol and cigarettes, he chooses to consume cigarettes.

Reference no: EM13176144

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