Assume that every citizen of country X has the utility function of u(x, y) = 5x+
ID: 1178786 • Letter: A
Question
Assume that every citizen of country X has the utility function of u(x, y) = 5x+4y. Say that x denotes cigarettes and y denotes alcohol. The government of country X receives revenue from alcohol and cigarrete purchases but wants to curb alcohol consumption without decreasing its total revenue. Assuming that the government can levy a per unit tax on alcohol consumption, and taking initial prices and income to be px = 1; py = 1=2; I = 100, what is the minimal tax rate that will reduce alcohol consumption by at least 10 percent (without decreasing total revenue)? Make the convention that whenever prices are such that the consumer is
indierent between alcohol and cigarettes, he chooses to consume cigarettes.
Explanation / Answer
Write an equation for the budget line and draw the budget set on a graph when you are given prices and income or when you are given two points on the budget line.Graph the e