If an excise tax on good x and a lump- sum tax put Ms. Arbitrary on the same indifference curve, she would:
A)have identical budget lines under the two taxes.
B)consume more of x given the excise tax than given the lump- sum tax.
C)prefer the lump- sum tax.
D)consume no more of x given the excise tax than given the lump- sum tax.

Question

Quizplus · Accepted Answer

An excise tax on good x increases the price of the good and shifts the budget line inward, reducing the quantity of x that Ms. Arbitrary can afford. A lump-sum tax does not affect relative prices or the slope of the budget line, but simply reduces the amount of income available for consumption. If Ms. Arbitrary is on the same indifference curve under both taxes, she is still indifferent between the same bundles of goods. Since the excise tax reduces the quantity of x that she can afford, she will not consume more of x under this tax than under the lump-sum tax. Therefore, the correct answer is D, as she will consume no more of x given the excise tax than given the lump-sum tax.

If an Excise Tax on Good X and a Lump-