An agent consumes goods x and y, with prices P_x = $5 per unit and P_y = $8 per unit. The consumer's income is I = $48. The government imposes a tax of $1 per unit on good x. What is the new equation for the budget constraint? A) y = 6 - (5/8)x B) y = 6 - .75x C) y = 8 - (6/8)x D) y = 48 - 8x

Question

Quizplus · Accepted Answer

With a tax of $1 per unit on good x, the new price of x is P_x + tax = $6 per unit. Thus, the new budget constraint equation is: P_xx + P_yy = I, or 6x + 8y = 48. Solving for y, we get y = 6 - 0.75x, which matches with option B.

An Agent Consumes Goods X and Y, with Prices Px

An Agent Consumes Goods X and Y, with Prices P_x