Question 1: The city of Denver is concerned with its citizens' consumption of craft beer. They (the city government) feel that citizens are consuming too much craft beer. In response, the city has several policies that seek to reduce the consumption of craft beer. a) Assume the price of craft beer is $5 and the price of all other goods (AOG) is $1. Further, assume that citizens in Denver have an income of 100 (for simplicity). Draw a budget constraint that a citizen might face. Clearly label a point along the budget line that could maximize a consumer's utility. b) The city government decides to place a $2 tax on craft beer, raising the price for craft beer to $7. Would you expect this policy to reduce the consumption of craft beer? Why or why not? Clearly explain your answer using a new (i.e., don't use the one from part a) well-labeled graph. c) A group of well-intended citizens argues that the tax on craft beer does more harm than good. Instead, they argue, the city should subsidize all other goods. Reluctantly, the city agrees and removes the tax and instead, places a 50-cent subsidy on all other goods. This brings the price of all other goods to $0.50 and the price of craft beer to $5. Does this policy reduce the consumption of craft beer? Why or why not?
Question 1: The city of Denver is concerned with its citizens' consumption of craft beer. They (the city government) feel that citizens are consuming too much craft beer. In response, the city has several policies that seek to reduce the consumption of craft beer. a) Assume the price of craft beer is $5 and the price of all other goods (AOG) is $1. Further, assume that citizens in Denver have an income of 100 (for simplicity). Draw a budget constraint that a citizen might face. Clearly label a point along the budget line that could maximize a consumer's utility. b) The city government decides to place a $2 tax on craft beer, raising the price for craft beer to $7. Would you expect this policy to reduce the consumption of craft beer? Why or why not? Clearly explain your answer using a new (i.e., don't use the one from part a) well-labeled graph. c) A group of well-intended citizens argues that the tax on craft beer does more harm than good. Instead, they argue, the city should subsidize all other goods. Reluctantly, the city agrees and removes the tax and instead, places a 50-cent subsidy on all other goods. This brings the price of all other goods to $0.50 and the price of craft beer to $5. Does this policy reduce the consumption of craft beer? Why or why not?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 1: The city of Denver is concerned with its citizens' consumption of craft beer. They
(the city government) feel that citizens are consuming too much craft beer. In response, the city
has several policies that seek to reduce the consumption of craft beer.
a) Assume the price of craft beer is $5 and the price of all other goods (AOG) is $1. Further,
assume that citizens in Denver have an income of 100 (for simplicity). Draw a budget
constraint that a citizen might face. Clearly label a point along the budget line that could
maximize a consumer's utility.
b) The city government decides to place a $2 tax on craft beer, raising the price for craft
beer to $7. Would you expect this policy to reduce the consumption of craft beer? Why or
why not? Clearly explain your answer using a new (i.e., don't use the one from part a)
well-labeled graph.
c) A group of well-intended citizens argues that the tax on craft beer does more harm than
good. Instead, they argue, the city should subsidize all other goods. Reluctantly, the city
agrees and removes the tax and instead, places a 50-cent subsidy on all other goods. This
brings the price of all other goods to $0.50 and the price of craft beer to $5. Does this
policy reduce the consumption of craft beer? Why or why not?
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