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**Unformatted text preview: **Which means it would be the same as dividing your income by the factor of price increase. 5. Taxes, Subsidies, and Rationing Two types of Taxes & Subsidies, quantity and value. Taxes: Quantity = P’ = P+t Value= P’ = P(1+τ) τ = percentage of tax Subsidies: Quantity = P’ = P-S Value = P’ = P(1-σ) σ=percentage of subsidy Lump-Sum: m+l (subsidy) m-l (tax) Rationing: Refer to graph in book. Examples ticketmaster ticket purchase limit or iphone purchase limits Review Question 6: P1X1+P2X2=m 1. L-S Tax of u 2. Quantity tax t for good 1 3. Quantity subsidy s for good 2 (P1+t)X1+(P2-s)X2=m-u Intercepts: m/P1 > m-u/P1+t ; m/P2 ? m-u/P2-s Slope: -P1/P2 < -P1+t/P2-s in absolute value Review Question 7: m increases P1 decreases P2 stays the same Are you at least well off? Yes because the budget line goes outward and the slope will decrease or become less steep thus increasing affordability....

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