fig. 22.9
Effect of Consumption Tax. Using Figure 22.9 as a starting point, suppose the consumer chooses point e (spend $13 now) and point d (save $7). Suppose the government imposes a 20 percent tax on spending (consumption now), meaning that for every dollar spent now, $0.20 goes to the government, leaving only $0.80 to purchase products.
a. Use a graph to show the effect of the consumption tax on the relevant curves.
b. On your graph, show, for the initial bundle ($13, $7), the tax-induced gap between the marginal utility per dollar on spending and the marginal utility per dollar of saving.
c. Which direction will the consumer go—more spending or more saving?
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