Income tax Let’s now consider the case where government collects an income tax (is just tax on income, and does not depend consumed quantity) instead of quantity tax, and raises the same amount of revenue. Government imposes an income tax which is the same amount when it collects quantity tax to Jack. (In other words, Jacks income decreases in the amount of revenue collected with quantity tax in part (C)).

G) How much of each good will he demand in this case? (The price of x1 is 3$ but his income decreased)

H) In what type of tax would Jack be as better off? (Quantity tax or income tax) In other words, compare utilities obtain by bundles with quantity tax or income tax [from part B and G].

I) Discuss what type of tax is better for consumers. (In both type of tax, government collects the same amount of tax revenue so both types of tax is same for government)

J) Draw Jack’s best bundles in a graph. (Budget curves, best bundles and maximum utilities for all of 3 situations in one graph). Show in the graph, what type of tax is preferable.

K) Calculate the consumer surplus in all of the 3 situations. (No tax, quantity tax and income tax). Discuss what type of tax causes the higher loss of consumer surplus.

L) Draw and drive Jack’s demand curve for good 1 by using different best bundles and prices? (Quantity of x1 when px1 is 3$ and quantity of x1 when px1 is 4 $)

M) Calculate own price elasticity of demand for good 1.

N) Calculate income elasticity of demand for good 1.