Mr. Inflexible's utility function is U(x₁,x₂)= min(x_1,x₂). The price of x₁is $1, the price of x₂is $2, and Mr. Inflexible's budget is $120. If Mr. Inflexible were given the choice between a lump- sum tax and an excise tax which raised the same amount of tax revenue, then: A)he would prefer the excise tax. B)he would prefer the lump- sum tax. C)he would be indifferent between them. D)one cannot say which tax he would prefer.

Question

Quizplus · Accepted Answer

Mr. Inflexible's utility function is U(x₁,x₂)= min(x_1,x₂). This means that he is only interested in the minimum of the two goods. If the price of x₁ is $1 and the price of x₂ is $2, then he will always buy x₁ until his budget is exhausted. Therefore, he will always consume x₁ = 120 and x₂ = 0.A lump-sum tax would reduce his budget by a fixed amount, but it would not affect his consumption of x₁ and x₂. An excise tax would increase the price of x₁, which would reduce his consumption of x₁ and increase his consumption of x₂. However, since he is only interested in the minimum of the two goods, his utility will not change. Therefore, he would be indifferent between a lump-sum tax and an excise tax that raised the same amount of tax revenue.

Mr Inflexible's Utility Function Is U(x1,x2)= Min(x1,x2)

Mr Inflexible's Utility Function Is U(x₁,x₂)= Min(x_1,x₂)