Question

Consider a consumer who is choosing how many of two goods to buy: Footballs and cricket balls. The consumer has an income of $20, and the cost of a football is $4 and a cricket ball is $2. (a) Write down the equation for the consumer’s budget constraint and graph it.(b) The government decides that football is evil and needs to be taxed. They introduce a 50% tax on each football sold. Rewrite and re-graph the budget constraint.(c) A new government is elected that hates all sports. They now tax both footballs and cricket balls at 50%. What does the budget constraint look like now?

Answer 1

a.

Y=20

f= 4

c=2

Budget constraint is given by; $y= 4f + 2c$

Hence; $BC= 4F+2C = 20$

b.

New cost of football = 1.5 x 4 = 6

New budget constraint is

$6f + 2c = 20$

c.

The costs football and cricket will increase by 50%

New costs will be;

$football = 1.50 x 4 = \$6$

$cricket = 1.50 x 2 = \$ 3$

Therefore the new budget constraint will be

$6f + 3c = 20$

The new budget constraint will be more flatter, meaning more crickets will be bought.