Question

There are two goods in the economy beer and chicken wings. The consumer has an income of $9,750. The government believes that beer is bad for you so it is thinking of imposing a tax of 59% on beer. The price of one beer is 115 and the price of one order of chicken wings is 119. By how much does the maximum amount of beer that the consumer can afford changes after the tax is imposed? (If she can afford 10 more units input 10 as you answer if she can afford 10 less units input -10 and so on)

Answer 1

Answer
the new price after tax =old price *(1+tax rate)
=115*(1+0.59)
=182.85
the new price is $182.85

the maximum amount of beer consumer can purchase =income/price

at old price
The maximum amount of beer=9750/115
=84.7826087
after price change
beer quantity=9750/182.85=53.3223954

the change in quantity=new quantity-old quantity
=53.3223954-84.7826087
=-31.4602133

the maximum amount of beer that the consumer can afford changes after the tax is -31.46 units