Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t₁Y, and Y = 50K^0.5L^0.5, where K = 100 and L = 100. If t₁ increases from 0.2 to 0.25, then consumption decreases by: A)70. B)140. C)175. D)250.

Question

Quizplus · Accepted Answer

When t1 increases from 0.2 to 0.25, the tax function becomes T = 100 + 0.25Y. Substituting this into the consumption function, we get C = 200 + 0.7(Y - (100 + 0.25Y)) = 200 + 0.7(Y - 100 - 0.25Y) = 200 + 0.7(0.75Y - 100) = 200 + 0.525Y - 70 = 130 + 0.525Y. Therefore, consumption decreases by 70.

Assume That the Consumption Function Is Given by C =