Posted by raina on .
If the government imposes a quantity tax on the consumption of a good, it
means that the consumer has to pay for each unit of the good its price plus
the tax. For example, if the price of a chocolate bar is $5 and the government
imposes a tax of 20 cents on the consumption of a chocolate bar, then the
actual price the consumer pays for a chocolate bar is $5 + $0.2 = $5.20.
Suppose there are two goods available for consumption, good 1 and good
2, and that the government taxes consumption of good 2 that is in excess
of quantity x2 (that is, consumption of good 2 up to quantity x2 is exempt
of tax). Denote by t the amount of dollars a consumer has to pay for every
unity she consumes in excess of x2.
Draw the budget set of a consumer with income m. Is the slope of the
budget line constant?