Discussion:
The only goods you buy are apples and oranges. Both apples and oranges sell for $1 per piece and your income is $10 a day.
1. Draw your budget line.
2. One Tuesday the government announces two new policies. First, you must pay a head tax (lump sum tax) of $3 a day. Second, the government will subsidize the purchase of apples (but not of oranges) so that the price of an apple falls to 50 cents. Draw your new budget line.
3. Suppose that with the new policies in place, you choose to purchase 6 apples. Add an indifference curve to your diagram that shows your new tangency.
4. Is your new tangency on, above, or below the original budget line? Explain how you know.
5. On Tuesday, after the new policies are implemented, are you happier, less happy, or just as happy as on Monday?