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In: Economics

A student consumes beer and a composite good. Currently, the government imposes an excise tax of...

A student consumes beer and a composite good. Currently, the government imposes an excise tax of $0.50 per unit of beer. The student now purchases 20 units of beer per month. The government is considering eliminating the excise tax on beer and, instead, requiring consumers to pay $10 per month as a lump- sum tax. If the new proposal is adopted, how will the student’s beer consumption and welfare to be affected? (Assume that the student’s marginal rate of substitution of beer for other goods is diminishing.)

Show your answer with a graph.

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Expert Solution

Rahul Sunny answered 1 year ago
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