please teach explain step by step . Consider a government that raises money in a two-good economy by taxing good 1 at a rateof t per unit. The government is considering replacing these taxes with a lump-sum taxto the consumer that raises the same revenue. Thus, if the consumer consumes x units ofgood 1 before the change in taxes, she must pay the government a lump sum of tx afterthe change. Suppose, moreover, that prices change only by the amount of the tax; i.e., ifprices are (p₁ + t, p2) before the change, then they become (P₁, P2) after. Let x = (x1, x2) bethe consumer's demand before the change, and x' (x1, x2) the consumer's demand after.Suppose that x = x'.=(a) Is one of x or x' revealed preferred to the other (and if so, which)?Solution: The budget constraint before the change is (p₁+t)ã₁+p2ã2 ≤w and after thechange is p₁₁ +p2x2 ≤ w − tx₁. Since x = (x1, x2) satisfies the first budget constraint,it must also satisfy the second one. Hence x is affordable after the change when x' ischosen. Therefore, x' is revealed preferred to x. Depending on the choices, x may ormay not be revealed preferred to x'; it is impossible to determine.

According to the revealed preference theory, you may infer what consumers want by looking at what…

Consider a government that raises money in a two-good economy by taxing good 1 at a rate of t per unit. The government is considering replacing these taxes with a lump-sum tax to the consumer that raises the same revenue. Thus, if the consumer consumes x units of good 1 before the change in taxes, she must pay the government a lump sum of tx after the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if prices are (p₁ +t, p2) before the change, then they become (P₁, P2) after. Let x = (x₁, x₂) be the consumer's demand before the change, and x' = (x₁, x2) the consumer's demand after. Suppose that x‡ x'.

Consider a government that raises money in a two-good economy by taxing good 1 at a rate of t per unit. The government is considering replacing these taxes with a lump-sum tax to the consumer that raises the same revenue. Thus, if the consumer consumes x units of good 1 before the change in taxes, she must pay the government a lump sum of tx after the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if prices are (p₁ +t, p2) before the change, then they become (P₁, P2) after. Let x = (x₁, x₂) be the consumer's demand before the change, and x' = (x₁, x2) the consumer's demand after. Suppose that x‡ x'.

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter6: Supply, Demand And Government Policies

Section: Chapter Questions

Problem 5QR

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