Change in budget line-increase in tax by government

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Reference no: EM1316164

Suppose M=30, P1=2, P2=3.

a) The government wishes to impose a quantity (Per unit) tax of $0.25 on good 1.Show the effect of imposing this tax in a clearly labelled graph containing before and after budget lines.

b) Suppose instead that the government wishes to impose a value tax of $0.25 on each dollar of the consumer's expenditure on good 1.Show the effect of imposing this tax in a graph containing before and after budget lines.

c) Can we say which of these is better for a rational consumer? Explain.

Reference no: EM1316164

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