Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 4: Problem 11

Give a numerical example that illustrates how a tax placed on the purchase of good \(X\) can change the relative price of good \(X\) in terms of good \(Y\).

Short Answer

Expert verified
The relative price of good \(X\) in terms of good \(Y\) changed from 2 to 2.4 after the tax imposition on good \(X\).

Step by step solution

01

Setup of the problem

Before applying the tax, assume the current price of good \(X\) is $10 per unit and the price of good \(Y\) is $5 per unit. Here, the relative price of \(X\) in terms of \(Y\) is 2, since a unit of \(X\) is worth 2 units of \(Y\). In mathematical terms, this is computed as $\frac{Price( X )}{Price( Y )}=\frac{10}{5}=2.$
02

Introduce a tax on good X

Let's say a tax of $2 is imposed on good \(X\). This translates to a new price of $12 for good \(X\) which now incorporates the tax imposed. Note that the price of good \(Y\) remains unaffected by this tax.
03

Compute the new relative price

Now, we recalculate the relative price of \(X\) in terms of \(Y\) under the new tax regime. This involves recalculating the ratio in the similar manner as before: $\frac{Price( X )}{Price( Y )}=\frac{12}{5}=2.4$ This means, under the new tax regime, a unit of \(X\) is now worth 2.4 units of \(Y\). Hence the introduction of the tax on good \(X\) increased the relative price of \(X\) in terms of \(Y\) from 2 to 2.4.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain why fewer exchanges are made when a disequilibrium price (below the equilibrium price) exists than when the equilibrium price exists.

Should grades in an economics class be "rationed" according to dollar price instead of how well a student does on exams? If they were and prospective employers learned of it, what effect might this have on the value of your college degree?

Buyers always prefer lower prices to higher prices. Do you agree or disagree with this statement? Explain your answer.

What is the difference between a price ceiling and a price floor? What effect is the same for both a price ceiling and a price floor?

James lives in a rent-controlled apartment and has for the past few weeks been trying to get the supervisor to fix his shower. What does waiting to get one's shower fixed have to do with a rent-controlled apartment?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free