This preview shows page 1. Sign up to view the full content.
Unformatted text preview: is selling some of his catch to the market. If he
consumes more fish than he catches, he is better off with a price decline (as drawn). If he
sells some of his fish, a price decline leaves him on a lower indifference curve (to the left
of E). 4. Note that when the problem said "the fixed amount $0.25*X", it was meant to refer to
the X John would have chosen given the quantity tax (i.e. the tax in which he paid an
amount that varied with the quantity of burgers he consumed).
a) b) The Lump Sum Principle tells us that John is better off giving up $0.25X of his income
than paying this tax. The following graph shows this. On the graph, the budget line with the
tax is steeper than the budget line without the tax, but they both pass through the
consumption bundle John would have chosen if the tax were in place. To calculate the number of utils associated with points B and C, use the demand functions
View Full Document
- Spring '11