Question

2. Two goods, x and y, are perfect complements, and are best consumed in a ratio of one-to-one. (i) Using a diagram, show that if a tax is levied on consumption of good x, and the revenue is returned to the consumer directly (as an income supplement) no loss of utility is imposed on the consumer. (ii) What about the case when x and y are perfect substitutes? Explain your reasoning, and give some intuition.

          2. Two goods, x and y, are perfect complements, and are best consumed in a ratio of one-to-one.
(i) Using a diagram, show that if a tax is levied on consumption of good x, and the revenue is returned to the consumer directly (as an income supplement) no loss of utility is imposed on the consumer.
(ii) What about the case when x and y are perfect substitutes? Explain your reasoning, and give some intuition.

2. Two goods, x and y, are perfect complements, and are best consumed in a ratio of one-to-one.
(i) Using a diagram, show that if a tax is levied on consumption of good x, and the revenue is returned to the consumer directly (as an income supplement) no loss of utility is imposed on the consumer.
(ii) What about the case when x and y are perfect substitutes? Explain your reasoning, and give some intuition.

Added by Carla N.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Prabhat Tyagi

Step 1

This means that the consumer needs one unit of x for every unit of y consumed. To illustrate this, we can use a diagram with x on the x-axis and y on the y-axis. The indifference curves will be L-shaped, representing the fixed ratio of consumption. The slope of Show more…

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2. Two goods, x and y, are perfect complements, and are best consumed in a ratio of one-to- one. (i) Using a diagram, show that if a tax is levied on consumption of good c, and the revenue is returned to the consumer directly (as an income supplement) no loss of utility is imposed on the consumer. (ii) What about the case when x and y are perfect substitutes? Explain your reasoning, and give some intuition.