Question

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. Also, suppose that all states initially impose state sales taxes on all goods (including food), but then the states exempt food from the state sales tax. How does this tax policy change alter the consumer's budget line

Answer 1

The way that this policy is going to be known to affect the consumers budget line is that it would make the budget line flatter.

How does this policy affect the budget line?

First the formula for the intercept is given as

budget divided by the price of the good on their different axis.

The exemption of taxes is going to make the price of the good on x to fall. This would then raise the ability to afford it. The intercept then goes to the right. Hence it is flatter.

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