Suppose the government levies a per-unit tax on TVs, and this tax increases the price of TVs by $100. Model TVs as x1 and all other goods as a composite good x2.
a. For a consumer with income I, write down an equation for the before-tax budget line.
b. Write down the after-tax budget line equation.
c. Suppose you know the bundle on the after-tax budget that is chosen by the consumer contains 3 TVs. How much in tax revenue is the government raising from this consumer?
d. If the government replaced the tax on TVs with a lump sum tax that does not alter any prices but raises the same amount of revenue from the consumer, how would this change the consumer's budget line equation?
What will be an ideal response?
a. x2=I- p1x1 or I=p1x1+ x2
b. x2=I- (p1+100)x1 or I= (p1+100)x1+ x2
c. $300
d. x2=(I- 300)/p2- (p1/p2)x1 or I=p1x1+ x2 + 300
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