optimal bundle. The price of pizza increases 20% because of the tax, and Ben’s budget line pivots inward. The new price of pizza is P Z 1.2P Z . This shrinks the size of Ben’s budget set, and he will no longer be able to afford his old bundle. His new optimal bundle is where the lower indifference curve U b is tangent to his new budget line. Ben now consumes Z b pizza and B b burritos. Note: The diagram shows that Ben buys fewer burritos after the tax, but he could buy more if his indifference curves were drawn differently. c. Suppose instead that pizza is rationed at a quantity less than Ben’s desired quantity.
