Question

Suppose that a budget equation is goven by p1x1 + p2x2 = m. The government decides to impose a lump-sum tax of u, a quantity tax on good 1 of t, and a quantity subsidy on good 2 of s. What is the formular for the new budget line

with graph plz

Answer 1

Now, This will make three cases:-

• Fall in Income and rise in price of good 1 due to quantity tax will always reduce the quantity from the old quantity of good 1 as both will reduce have same effect of reducing it.
• But a fall in Income and a fall in price of good 2 due to a quantity subsidy will have 3 different effects as both have opposite effects in for new quantity of good 2.

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