Suppose that Marvin has m to spend on poutine and salad. Suppose that poutine costs p...

Suppose that Marvin has m to spend on poutine and salad. Suppose that poutine costs p dollars per ounce and salad costs q dollars per pound. The Prime Minister is worried that Quebec's national dish is contributing to an obesity problem. Therefore, he has implemented a "junk food tax". After the purchase of one large poutine (10 ounces), each additional ounce of poutine purchased is subjected to a tax of t dollars per ounce.

- Draw Marvin's budget constraint in the absence of the "junk food tax" on a graph with salad on the vertical axis and poutine on the horizontal axis. What is the maximum amount of salad that he can purchase? What is the maximum amount of poutine he can purchase?

- What is the relative price of salad?

- Draw Marvin's budget set after the Prime Minister implements the "junk food tax" assuming that he has enough income to purchase more than one large poutine. What is the maximum amount of salad that he can purchase now? What is the maximum amount of poutine that he can purchase now?

- What happens to the relative price of salad? Explain the intuition.

- What happens to the budget set if Marvin has enough money to purchase only 6 ounces of poutine?

- Suppose that Marvin has enough money to purchase 10 large poutines. Suppose that Marvin considers poutine and salad to be perfect substitutes. What can you say about Marvin's marginal rate of substitution of salad for poutine if he spends all his money on poutine before the implementation of the "junk food tax" and bus only one large poutine after the policy intervention ?

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Expert Solution

Rahul Sunny answered 1 year ago

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