5. Consider an economy with two goods, A and B. Suppose the price of good A is p and let the price of good B be 1. There is a large number of identical consumers. The indifference curves of consumers have the usual shape with diminishing marginal rate of substitution between the two goods. Suppose the government must raise a tax revenue of R, and can do this either by imposing a per-unit tax of t on good A, or by imposing a lump-sum tax T on each consumer. Which policy would the consumers prefer? Explain your reasoning carefully, using any appropriate diagram, and explain the intuition behind your result.
5. Consider an economy with two goods, A and B. Suppose the price of good A is p and let the price of good B be 1. There is a large number of identical consumers. The indifference curves of consumers have the usual shape with diminishing marginal rate of substitution between the two goods. Suppose the government must raise a tax revenue of R, and can do this either by imposing a per-unit tax of t on good A, or by imposing a lump-sum tax T on each consumer. Which policy would the consumers prefer? Explain your reasoning carefully, using any appropriate diagram, and explain the intuition behind your result.
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.9P
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![5. Consider an economy with two goods, A and B. Suppose the price of good
A is p and let the price of good B be 1. There is a large number of identical
consumers. The indifference curves of consumers have the usual shape with
diminishing marginal rate of substitution between the two goods. Suppose the
government must raise a tax revenue of R, and can do this either by imposing a
per-unit tax of t on good A, or by imposing a lump-sum tax T on each consumer.
Which policy would the consumers prefer? Explain your reasoning carefully,
using any appropriate diagram, and explain the intuition behind your result.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9c09cda8-9449-4cfd-99d0-d7ccecd9c5e9%2Fcf1fe171-2b74-4c38-97cf-76aed7a799e5%2Fifwa2a_processed.jpeg&w=3840&q=75)
Transcribed Image Text:5. Consider an economy with two goods, A and B. Suppose the price of good
A is p and let the price of good B be 1. There is a large number of identical
consumers. The indifference curves of consumers have the usual shape with
diminishing marginal rate of substitution between the two goods. Suppose the
government must raise a tax revenue of R, and can do this either by imposing a
per-unit tax of t on good A, or by imposing a lump-sum tax T on each consumer.
Which policy would the consumers prefer? Explain your reasoning carefully,
using any appropriate diagram, and explain the intuition behind your result.
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