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Problem Set #1 1. This question concerns a consumer who is choosing how many of two goods to buy: Footballs and cricket balls. The consumer has an income of $20, and the cost of a football is $4 and a
cricket ball is $2 (a) Write down the equation for the consumer’s budget constraint and graph it. (b) The government decides that football is evil and needs to be taxed. They introduce a 50% tax on each football sold (this is called an ad-valorem tax). Rewrite and re—graph the budget
constraint. (c) A new government is elected that hates all sports. They now tax both footballs and cricket balls at 50% (this is a uniform ad-valorem tax). What does the budget constraint look like
now? (d) Due to a threat of revolt amongst sports fans, the government hands out a subsidy of $10
to the consumer. What does their new budget constraint look like? (e) Revolution comes, and all taxes and subsidies are abolished. Even better, the consumer
finds a new shop that offers bulk discounts. In this shop1 footballs cost $4 each if you buy 3 or less. However, the cost of any additional football after 3 is $2. What does the budget
set look like now?

Top Answer

Quick reminders: x and y are variables I chose not indicative of the axis on the graph Part e: the new income is found... View the full answer

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I= $20
f = $4 C = $2
+ x (2.DP = OS
a ) 20 = 4 x + 2 y
footballs
if x = 0 ; y = 10
8
if y = oj x = 5
6
N
Budget constraint
2
4
8 10
Cricket
balls
b)
New budget with football tax
20 = ( 4+ 2 ) x +...

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