   Chapter 4, Problem 11QP

Chapter
Section
Textbook Problem

Give a numerical example that illustrates how a tax placed on the purchase of good X can change the relative price of good X in terms of good Y.

To determine

The impact of tax on relative price.

Explanation

The relative price of a good is measured as the price of a good expressed in terms of another good. When the absolute prices of two goods X and Y are given, the relative price of good X in terms of good Y can be calculated using Equation (1) as follows:

Relative priceX=Absolute PriceXAbsolute PriceY        (1)

It is assumed that the absolute price of good X is $10, and the absolute price of good Y is$20.

The relative price of good X in terms of good Y can be calculated by substituting the respective values in Equation (1) as follows:

Relative priceX=1020=0

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