Question

1) Give an example of something you purchase that has a special tax placed on it. For example, cigarettes have a special tax placed on them.

      a) How high would the price have to go (due to a tax increase) in order for you to no longer purchase it?

2) Give an example of something you purchase that is subsidized. For example, cotton is subsidized.          

      a) Do you think you would still purchase this product or service even if it wasn't subsidized (because it would be more expensive)?

Answer 1

1.a)

The price has to go beyond my marginal benefit (MB) of smoking so that I will not purchase it.

My purchase will continue for a price where MB is greater than or equal to marginal cost (MC); (MB ≥ MC). Therefore, once the price of cigarette reaches at a point where (MB < MC) I will not purchase further.

1.b)

Answer: yes

Purchasing depends on my budget and marginal utility. If budget permits and marginal utility of such product is high, I will certainly go for purchasing it. Marginal utility is the difference of total utility between the two consecutive units.