Question

Sponge Bob is retired and his only income is his pension of $375 per month, which he spends exclusively on burgers and sodas. For the past several years when burgers cost $15 each and sodas were $15 per case, he spent his entire income on 10 burgers and 15 cases of soda each month. This year due to favorable trade conditions between the outside world and Bikini Bottom the price of burgers fell dramatically to $5 each and the price of sodas fell to $10 per case. Sponge Bob was delighted until the government of Bikini Bottom decided to take advantage of the new lower prices and imposed an across the board income tax of $175 per person under the notion that with lower prices, residents now could afford to pay more in taxes. Sponge Bob has the usual convex shaped indifference curves for these two goods

Will Sponge Bob be able to afford the lifestyle he is accustomed too (i.e., his usual consumption pattern)?

Will Sponge Bob change the amount of burgers and sodas he buys this year? If so, explain how and why?

Will Sponge Bob be better off, as well off, or worse off than last year? Why?

Answer 1

a) Yes he will be able to afford the life style he is accustomed to as usually he buys 10 burgers and 15 cases of Soda so now the cost that he will spend on them is (5x10 +10x15) = 200$
The remaining 175$ is paid for taxes which means that there is no change in any of his things which are as usual as before.

b) No he doesnot change the amount of burgers and soda he buys this year as he has to pay 175$ tax which makes him left with 200$ . Thus he buys the same amount of sodas and burgers as usual with out any change with that 200$

10x5 + 10x15 = 200

c) He will be as worse of than last year as there is no change in anything in his life because the remaning amount that he will have will have to be paid as tax which is a big blow as he may never thought of this decision from the government