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F is a small society that produces and consumes just two goods: tequila and medicine. The price of tequila and medicine are both $1 per unit, but the marginal utility of medicine is less than the marginal utility of tequila. All consumers have identical Cobb-Douglass preferences.
Q.1 Explain how equilibrium is achieved. Provide a graph with your explanation. Place medicine on the horizontal axis and tequila on the vertical axis. Clearly label the budget line and the indifference curves before and in equilibrium.
Q2. F has decided to place a per unit tax on Medicine. You are provided with following information:
How much tax revenue will F collect from a typical consumer? Use a graph with medicine on the horizontal axis and tequila on the vertical axis to explain. Clearly label budget lines and indifference curves. Provide both a written and graphical analysis.
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