Tax on consumers
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Tax on consumers
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fall due to tax on consumers
Impact of tax ↑ ↓ CS gets smaller ps gets smaller
Tax revenue =
Additional region - CS+PS that was lost = deadweight loss
Subsidy on consumers
Market price with sub
CS increases PS increases
Add up additional gains = net gains
Government spending =
Net loss =
Consumer Choice Model
1. Preferences ⎱ determinants
2. Constraints ⎰
Ranking of different quantity bundles of various goods
Bundle - combination of quantity of each of the goods
Simple → 2 goods only - root beer(R) and eggs(E)
Way of comparing bundles to see which we like best
Four Assumptions “axioms”
1. Completeness - preferences are complete. For any 2 bundles A and B, one of the following must be true
1) A is preferred to B
2) B is preferred to A
3) A and B are equally preferred
2. Transitivity - “more is preferred to less”
R E → (4,2)
(3, 3) ?(2, 10)?
All bundles are preferred
/eventually will be indifferent
IC - bundles that consumer is indifferent to
A is least preferred, C is most
Stronger preference for root beer, give up more eggs to get R
Slope = = marginal rate of substitution
= how many eggs the consumer will give up to have more R
U(R, E) how much utility a person gets from different bundles
U (A) = (B) A is preferred to B
A B C
U(R,E) = R • E (2,3) (3,4) (1,5)
UA = 6 UB = 12 UC = 5
2. Transitivity - have to have absolute rankings
3. Monotonicity - more is preferred to less
Slope is negative
4. Convexity - diminishing marginal rate of substitution
⤷ bowed inwards
Marginal rate of substitution (MRS) -
= amount of beer willing to give up to
have one more pizza
The more pizza I have, the less will I give up to get more beer less my minimum