Question

A consumer has a utility function that represents perfect substitute preferences (two goods, good 1 and...

A consumer has a utility function that represents perfect substitute preferences (two goods, good 1 and good 2).

The government imposes a tax on quantity for good 1 only, if the quantity is > Q. So whenever the quantity consumed of good 1 is > Q, the consumer has to pay a tax t for every unit over Q.

How does this affect the consumer's consumption?

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Answer #1

Two goods are perfect substitute to a consumer if he gets same level of utility from consuming any of them. In this case good 1 and good 2 are perfect substitute. The consumer can purchase any of them depending on the price of the goods.

The consumer usually purchase the good with lower price.

I)

If price of good one is higher than price of good 2, then the consumer will always purchase good 2. Even when there is a tax on good 1 the consumer will purchase good 2 only, because price of good one is now even more higher.

If the price of good one is lower than price of good 2, then

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