Penny spends I = $48 on cigarettes (xc) and milk (xm), where the before-tax price of...

Penny spends I = $48 on cigarettes (xc) and milk (xm), where the before-tax price of cigarettes is $5/pack and the before tax price of milk is $4/jug.

If cigarettes face a quantity tax of $3/pack and milk is not taxed at all, what is the slope of Penny’s budget constraint over (xc,xm) bundles (so xc is on the horizontal axis)? (Don’t forget to include a minus sign when entering your answer)

Expert Solution

Money income = $48

Budget constraint gives us the combination of goods and services that a consumer is able to afford given his income.

When tax is imposed on a product, its price increases by the amount of the tax. Therefore, in this case the new price of Cigarettes is $5+$3 = $8

***Please refer to the handwritten notes

Rahul Sunny answered 1 year ago

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Penny spends I = $48 on cigarettes (xc) and milk (xm), where the before-tax price of...

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