Kamini consumes tacos and burritos. Suppose her marginal utility for tacos and h
ID: 1249119 • Letter: K
Question
Kamini consumes tacos and burritos. Suppose her marginal utility for tacos and her marginal utility for burritos are constant @ 4. Also, the price of a taco = $1.00, price of burrito = $2.00 Kamini's income (budget) = $20.00A) using a graph, draw kamini's utility-maximizing bundle of tacos and burritos being careful to illustrate kamini's budget line and indifference curve
B) Now, supposed the government levies a $2 excise tax on tacos, which effectively increase the price of a taco form $1 to $3. Using a graph, draw how this influences Kamini's optimal bundle of tacos and burritos.
Explanation / Answer
A) The graph is going to have an angled budget line. Put Tacos on the Y axis and Burritos on the X axis. The Y intercept should be 20. The X intercept should be 10. Then draw a straight horizontal line for your indifference curve such that it intersects at the Y intercept. Kamini is always going to purchase only tacos because the ratio of MU/P is always greater for tacos than burritos. This is because both marginal utilities are constant and equal while the prices are constant and unequal. B) a $2 tax on tacos is going to move the Y intercept of the budget constraint down to 20/3. Now, draw a straight virtical line indifference curve that intersects at the X intercept such that Kamini only purchases burritos. This is the same logic as before. The marginal utilities are always the same and the effective price is now always lower for burritos. So, MU/P is now always greater for burritos than tacos.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.