The question is in the attached image. Please note to only complete sections D and E. ignore a,b and c 2) Consider a mayor that oversees a community of 1000 people. The mayor wantsto build a local park and she needs to raise $100,000 in tax revenue to do so. Supposethat the mayor wants to raise the revenue by placing a sales tax on good ¤1. She doesnot know the preferences of the community members but knows that each resident hasan income of $2000 dollars and the community as a whole purchased 1 million units of x1at $1 per unit. So she figures that if she sets a sales tax of 10% she will be able to raisethe $100,000. This would imply that the effective price that people face for xı is $1.10to take into account the tax. Assume p2 = 1. The preferences and marginal utilities ofeach member of the community are givenU (®1, 22) = x}"x", MU-, =1/2(x2/&1)!/2,„1/21/2MUz2 = 1/2(x1/x2)/2.(1)a)Write down the budget constraint and solve for the demand functions.b) Given your answer how much tax revenue was actually raised? Does it differ fromwhat the mayor expected? If it does can you explain why?c) Calculate the utility level under this policy.c) Now suppose that instead of using a sales tax the mayor decides to use an income taxof 5% or $100 per person. Write out the new budget constraint in recalculate the demandfunctions.d) Does the mayor achieve her desired tax revenue?e) Calculate the utility under this scenario. which tax are residents better off under?

(c): The Mayor imposes income tax of 5% i.e. T = $100 per person. Thus new budget (BC) constraint…

c) Now suppose that instead of using a sales tax the mayor decides to use an income tax of 5% or $100 per person. Write out the new budget constraint in recalculate the demand functions. d) Does the mayor achieve her desired tax revenue? e) Calculate the utility under this scenario. which tax are residents better off under?

c) Now suppose that instead of using a sales tax the mayor decides to use an income tax of 5% or $100 per person. Write out the new budget constraint in recalculate the demand functions. d) Does the mayor achieve her desired tax revenue? e) Calculate the utility under this scenario. which tax are residents better off under?

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter12: The Design Of The Tax System

Section: Chapter Questions

Problem 4PA

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