Question 1

Originally the consumer faces the budget line p₁x₁ + p₂x₂ = m. Then the price of good 1 triples and the price of good 2 becomes 5 times larger. Write down an equation for the new budget l ine in terms of the original prices. Does the budget line becomes ?atter or steeper?

Question 2

If the government imposes a quantity tax on the consumption of a good, it means that the consumer has to pay for each unit of the good its price plus the tax. For example, if the price of a chocolate bar is $5 and the government imposes a tax of 20 cents on the consumption of a chocolate bar, then the actual price the consumer pays for a chocolate bar is $5 + $0.2 = $5.20.

Suppose there are two goods available for consumption, good 1 and good 2, and that the government taxes consumption of good 2 that is in excess of quantity x₂ (that is, consumption of good 2 up to quantity x₂ is exempt of tax). Denote by t the amount of dollars a consumer has to pay for every unity she consumes in excess of x₂.

Draw the budget set of a consumer with income m.Is the slope of the budget line constant?

Question 3

Suppose there are two goods available for consumption, good 1 and good 2, and the government has imposed rationing on the consumption of good 2, so that no more than x₂ can be consumed by a given consumer. Draw the budget set of a consumer who has income m.

Question 4

If the government establishes a quantity subsidy on the consumption of a good, it means that the consumer has to pay for each unity of the good its price minus the subsidy. That is, the price of the good becomes, in the consumer's point of view, p!s,where p is the price of the good and s is the subsidy.

Suppose the budget line is given by p₁x₁ + p₂x₂ = m.Thegovernment decides to impose a quantity tax of t on good 1 and a quantity subsidy of s on good 2. What is the formula for the new budget line? Can you tell whether it becomes ?atter or steeper?