Given the classic budget constraint and the utility function u(x1, x2) = x0.25x0.75
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Find the optimal bundle when p1 = 5, p2 = 10, and income M = 200
Assume a per unit tax of $5 is imposed on good one.Find the optimal bundle.Is our individual betteror worse off?
How much revenue does the tax generate?
Show that an equivalent lump sum tax leaves individuals better off by finding the optimal combination using your answer from above.
Why is a lump-sum tax preferable to a per unit tax?
Could a per unit tax ever be beneficial (think carbon tax).
Assume a 5% tax is imposed on the value sold. Write the budget constraint you would use to find the new optimal bundle under this tax.
Be able to describe the different between a lump-sum and per unit tax with a figure on an exam.