Problem
Response to the Gas Tax. Petrov earns $10,000 in pretax income and initially pays $2,200 in income taxes and consumes 600 gallons of gasoline per year (at a price of $3 per gallon) and spends $6,000 on another good (at a price of $1 per unit). At the initial bundle of gas and the other good, the marginal utility of gas is 30 utils and the marginal utility of the other good is 10 utils.
a. Draw a complete graph showing Petrov s initial (before the gas tax) budget line and his initial choice. At his initial choice, the marginal utility per dollar on gasoline is utils.
b. Suppose the government imposes a new gasoline tax of $2 per gallon, and assume that the gas tax increases the price of gas to $5. To make his initial bundle of gasoline and other goods affordable after the $2 gas tax, Petrov s income tax must decrease by __________.
c. After the tax changes, at his initial bundle the bang per buck of gasoline is________ , compared to a bang per buck of for the other good.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.