please teach explain step by step, how is it like to graph? Consider a government that raises money in a two-good economy by taxing good 1 at a rateof t per unit. The government is considering replacing these taxes with a lump-sum taxto the consumer that raises the same revenue. Thus, if the consumer consumes x units ofgood 1 before the change in taxes, she must pay the government a lump sum of tx afterthe change. Suppose, moreover, that prices change only by the amount of the tax; i.e., ifprices are (p₁+t, p2) before the change, then they become (P₁, P2) after. Let x = (x1, x₂) bethe consumer's demand before the change, and x' (x1,x2) the consumer's demand after.Suppose that x = x'.=(a) Is one of x or x' revealed preferred to the other (and if so, which)?(b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference,does the change in taxes lead to an increase or decrease in consumption of Good 1, or isit impossible to determine? What about Good 2?

Answered: Consider a government that raises money…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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please teach explain step by step, how is it like to graph?

Consider a government that raises money in a two-good economy by taxing good 1 at a rate
of t per unit. The government is considering replacing these taxes with a lump-sum tax
to the consumer that raises the same revenue. Thus, if the consumer consumes x units of
good 1 before the change in taxes, she must pay the government a lump sum of tx after
the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if
prices are (p₁+t, p2) before the change, then they become (P₁, P2) after. Let x = (x1, x₂) be
the consumer's demand before the change, and x' (x1,x2) the consumer's demand after.
Suppose that x = x'.
=
(a) Is one of x or x' revealed preferred to the other (and if so, which)?
(b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference,
does the change in taxes lead to an increase or decrease in consumption of Good 1, or is
it impossible to determine? What about Good 2?

Expert Solution

Step 1

To determine the revealed preferences firstly we need to analyze the impact of change from quantity unit tax to a lump sum income tax on the preferences of goods .

Above graph depicts the tilt in budget constraint which occurs out of the removal of unit tax and also provides the idea about the consumption points before and after change on policy .

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