Chapter 2- budget constraint

Question 1

Budget line

Answer 1

The set of bundles that costs exactly m

P1x1+p2x2=m

Question 2

Value tax/ subsidy (ad valorem)

Answer 2

Tax/subsidyon the value of a good, rather than the quantity purchased of a good.

(1 + τ)p1

Ex. If sales tax is 6% (1.06)P1

(1-θ)p1

Question 3

Lump-sum tax or subsidy

Answer 3

The govt gives or takes away some fixed amount of money regardless of the individual’s behavior.

This means the budget like will shift inward or outward because the income has been reduced or decreased.

Question 4

Numeraire good

Answer 4

A good whose price has been set to 1; all other goods are measured relative to the numerator goods price.

Question 5

Quantity tax/ subsidy

Answer 5

The consumer has to pay or is given a certain about to or from the government for each unit of a good they purchase.

Tax: P+ τ
Subsidy: P-τ

Question 6

Budget Constraint Formula

Answer 6

P1X1+p2X2>=m