Q 47

A taxpayer says, "Sure I pay a lot of income tax, but I don't mind because I get back just as much money as I pay in." Assuming that his facts are correct, explain why the taxpayer's reasoning is faulty. Use a diagram to show that an income tax can make a person worse off even if he is rebated an amount of money equal to what he paid in.

Q 48

Use a diagram to prove that in case there are two goods, the substitution effect of an increase in the price of good x reduces the demand for good x.

Q 49

Draw two different diagrams, one illustrating the Slutsky version of income and substitution effects and the other illustrating the Hicks version of income and substitution effects. How do these two notions differ?