Principle of microeconomics
5. (Sugar Tax) We will consider two goods - Sugar Drink (X-axis) and Other "Healthier" Foods (Y-axis),
assuming the prices of both goods are initially $1 each.Suppose you have $20 to spend.The City imposes
taxation on Sl per Sugar Drink.The following table shows relevant information of consumption behavior and utility levels.
|
|
Px
|
X
|
Py
|
Y
|
Income
|
Utility Level
|
|
Before Tax
|
$1
|
10
|
$1
|
10
|
|
100
|
|
After Tax
|
$2
|
5
|
$1
|
|
$20
|
50
|
|
Hypothetical
|
$2
|
8
|
$1
|
12.5
|
|
100
|
a) (4 points) Depict the scenarios before and after taxation,and the hypothetical point on the budget line and indifference curve.
b) (2 points) Do we have enough information to infer whether Sugar Drink is a normal or an inferior good?
c) (6 points) In addition to taxing Sugar Drink,the City gives you additional income of$10 as a goodwill, and hopes that you would spend on "Healthier"choice.Would you totally spend this $10 only on the "Healthier" choice?Would you be better off or worse off than before the taxation? Why? (Hint: With the $10 additional income,what is the budget constraint? Draw this budget constraint to a copy of the graphs you drew in part a) paying special attention to scale and number.)