Assume that Anne has 300 to spend on DVDs and CDs. Her optimal consumption of DVDs and CDs is illustrated by a tangency between a budget line and an indifference curve. Now assume that the price of CDs rises but the price of DVDs falls.
How can you show that Anne is made better off by these price changes?
A) Show that the price changes move Anne along her budget line to a higher indifference curve.
B) Show that Anne can now afford to buy more DVDs, which give her greater utility than CDs.
C) Show that the price changes shift Anne's budget line outward; the budget line is tangent to a higher indifference curve.
D) Show that Anne can afford to buy the optimal combination of DVDs and CDs at their original prices; then show that Anne can now reach a higher indifference curve.
Question 2
Sin taxes, such as taxes on alcoholic beverages, are intended to
A) generate funds to aid in the medical care of those harmed by the product.
B) reduce the quantity demanded.
C) generate money to subsidize production of the products taxed.
D) increase the amount of the products supplied.
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