6. Use indifference curves to illustrate the superiority of a lump sum tax over
ID: 1141568 • Letter: 6
Question
6. Use indifference curves to illustrate the superiority of a lump sum tax over an excise tax that generates the same revenue trom an individual tax payer. a. Label all important details and discuss the implication of your diagram. b. On a separate diagram show the affects of a general sales tax that raises the prices of all goods by 10%. eral income for W income (or wealth) of all taxpayers by 20%. d. Are either of these taxes neutral? Why or why not? Puzzle. Discuss why lump sum taxes are rarely used in spite of your answers to #6 above, although other neutral taxes such as sales taxes and VATs are widely used. 7.Explanation / Answer
an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]
There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.
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