Question:
Must we appeal to differences in taste to explain why Germans and Americans read different types of books, or can taxes and price differences explain this difference? Suppose that Max, a German, and Bob, an American, are avid readers with identical incomes and tastes. Both are indifferent between reading a novel in a traditional printed book or on an e-reader. Therefore, traditional books and e-books are perfect substitutes and the indifference curves for both Max and Bob have a slope of -1. Assume that the pretax price of e-books is less than for printed books in both Germany and the United States, but that the after-tax price of e-books is higher than for printed books in Germany only.
a) Describe their indifference curves.
b) Describe the slopes of their budget line.
c) Use an indifference curve and a budget line to show why Max and Bob make different choices.
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