Question

Penny spends I = $48 on cigarettes (xc) and milk (xm), where the before-tax price of cigarettes is $5/pack and the before tax price of milk is $4/jug.

If cigarettes face a quantity tax of $3/pack and milk is not taxed at all, what is the vertical intercept of Penny’s budget constraint over (xc,xm)bundles (so xc is on the horizontal axis)?

Answer 1