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AAMicroeconomics: An Intuitive Approach (with and without Calculus) Chapter Z




Question;2. Suppose;the government levies a per-unit tax on TVs, and this tax increases the price;of TVs by $100. Model TVs asx1 and all other goods as a composite goodx2.;a. For a consumer with income I;write down an equation for the before-tax budget line.;b. Write down the after-tax;budget line equation.;c. Suppose you know the bundle;on the after-tax budget that is chosen by the consumer contains 3 TVs. How much;in tax revenue is the government raising from this consumer?;d. If the government replaced;the tax on TVs with a lump sum tax that does not alter any prices but raises;the same amount of revenue from the consumer, how would this change the;consumer?s budget line equation?;3. Suppose;a business offers a 10% discount on the goodx1 that it sells.;a. Illustrate a consumer?s;before and after-discount budget constraint by modelingx2 as a composite good.;b. Suppose you observe only the;after-discount consumption decision of the consumer. Can you tell from this;information how much revenue the firm is giving up (from this consumer) by;offering the discount? If so, illustrate this in your graph.;c. Suppose that, instead of the;firm offering the 10% discount, the government subsidized consumption ofx1 sufficiently to reducep1 by 10%. Suppose again that you;only observe the after-subsidy decision of the consumer. Can you tell how much;of a subsidy payment is made to this consumer by the government? If so;illustrate it in your graph.;d. Why are your answers to (b);and (c) different?


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