2) MRS before the subsidy is = = 0.4
We can’t know for sure what would be MRS after the subsidy because we don’t know preferences nor the utility funcions of the poor.We don’t know which goods are more valuable to them so we can’t determine what would be MRS after subsidy.
3) This is the type of ad valorem subsidy which doesn’t change slope of the budget line, but allows poor to buy more goods. This theory tells us that the poor will decide himself regarding his preferences what is better for him. With additional $300 he is now on higher indiference curve and his utility funcion has higher value. So that is sure better for him than not gining him anything or giving him subsidy just for one product which he can’t sell.
4) In situation when food, education and other normal goods are considered as inferior or even Giffen’s goods (which may happennn) by the poor then it probably isn’t smartest thing to give them ad valorem subsidy, but for most poor this isn’t the case. With more money they become more aware and start to make changes because now they are able to do so.
5) Rich people are trying to say that the taxes on expensive cars will influence on their marginal choices and will not be able to establish market efficiency as it should be. Therefore, regarding second fundamental theorem of welfare economics only when distribution of lump sum was made at the beginning Pareto efficient outcomes could be established.
6)
Blue and green part are loss of welfare to consumers, red and orange part are loss of welfare to producers and finally green
