Jim Whitney Economics 250

Budget lines with taxes and subsidies

    Suppose a family has $120 to spend on food, with a price of $10 per unit, and other goods (Ig).

    Depict the family's budget line in both of the diagrams below (just do the BL, no indifference curves). Label the conusmption point 'a' where the family buys 4 units of food.

  Subsidy policies   Tax policies
  txsub_f1.gif (3603 bytes)   txsub_f1.gif (3603 bytes)
 
Suppose the government provides the family with a food subsidy of $5 per unit.
(1) (a) How much does each unit of food cost the family now? (b) How much food can it afford to buy?

 
(2) Draw the family's new budget line (BLb), and label the consumption point 'b' where the family consumes the same quantity of food as before.
(3) How much does the family spend on food now?

 
(4) How large is the government's subsidy expenditure?

 
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Suppose that the government decided to offer the family a $20 income subsidy instead of the food subsidy. Draw the family's budget line in that case and label it BLc.
 
Suppose the government imposes a food tax on the family of $5 per unit.
(1) (a) How much does each unit of food cost the family now? (b) How much food can it afford to buy?

 
(2) Draw the family's new budget line (BLb), and label the consumption point 'b' where the family consumes the same quantity of food as before.
(3) How much does the family spend on food now?

 
(4) How large is the government's tax revenue?

 
whitespace.gif (816 bytes)
Suppose that the government decided to impose a $20 income tax instead of the food tax. Draw the family's budget line in that case, and label it BLc.