Question

Suppose Betty’s budget constraint is described by the equation $400=5x1+10x2 Draw this budget equation? What is the slope of the budget line? Suppose now that the government places a tax of $2 per unit on good 2. Draw the new budget line? Suppose the tax is only for consumption over 10 units of x2. Now draw the budget line. Finally, suppose that the government decides to stick with the tax on x2 for consumption over 10 units, but it also decides that no one is allowed to consume more than 50 units of x1 (this is a very nosey government). Draw this budget line and, as always, include as many details as possible in your graph.

Answer 1

budget equation is------- Y= P1*QX1+P2*QX2

In the given statement ----- 400= 5*X1+10*X2

Where $400 is income (Y)

P1( price of good X1)=$5

P2( price of good X2)=$10

Qx1 & Qx2 are quantities of good X1& X2 respectively

X1. X2

80. 0

0. 40

Budget line ---------

The budget line above shows good X1 along Y axis while good X2 along X axis .The consumer can consume either 80 of good X1 or 40 units of good x2

#When govt imposes tax on good X2 -------------:

Due to tax @$2 on good X2, the new Px2=$12 while Px1=$5

Now the consumer will either consume 80 units of good X1 or 33.33 units (400/12) of good x2

X1. X2

80. 0

0. 33.33

As tax is imposed on quantity greater than 10 units of good x2, and as the quantity of good x2> 10, the price will be charged $12