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Unformatted text preview: Economics 21: Intermediate Microeconomics Topic 2: Consumer Theory - Income and Unit Taxes 2 pass through the point x ! = x 1 ! , x 2 ! ( ) . To see this, simply rearrange equation (3): p 1 + t ( ) x 1 ! + p 2 x 2 ! = m " p 1 x 1 ! + tx 1 ! + p 2 x 2 ! = m " p 1 x 1 ! + p 2 x 2 ! = m # tx 1 ! (6) Thus the optimal choice under the quantity tax , x ! = x 1 ! , x 2 ! ( ) , lies on the income tax budget line and as such is an affordable choice. It is not, however, an optimal choice. At x ! = x 1 ! , x 2 ! ( ) , the MRS is ! p 1 + t ( ) p 2 but the income tax allows the consumer to trade at an ERS of ! p 1 p 2 . Thus MRS > ERS at x ! = x 1 ! , x 2 ! ( ) ; the consumer is wiling to give up more good 2 then the market (under the income tax scheme) demands. Thus, he can move to a higher indifference curve by increasing his consumption of good 1 - see Figure 1: Figure 1: Comparing Income Taxes and Unit Taxes:...
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This note was uploaded on 07/16/2010 for the course ECON 21 taught by Professor Johng.sessions during the Summer '09 term at Dartmouth.
- Summer '09