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'.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.10P

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