Question

suppose m=30, p₁=2, p₂=3.

the government wishes to impose a quantity (i.e. per unit) tax of $0.25 on good 1.

Answer 1

Question

Show the effect of impossing this tax in a clearly labelled graph containing before and after budget lines

Solution

Given

$M=30,P_1=2,p_2=3\\Budget\space line \\30=2x_1+3x_2$

Tax of$0.25 on good I will lead to the following

$p_1$ becomes $(2+0.25)=2.25$

Budget line

$30=2.25x_1+3x_2$