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In class, we conducted the welfare analysis of a per unit tax. In this exercise, your task is to conduct the welfare analysis of proportional tax (VAT). In particular, consider

some market that is perfectly competitive (so we can use the model we learned about in class). In this market, the government introduces VAT. What are the consequences of VAT in terms of price, quantity, and social welfare? Your analysis should have a relevant graph accompanied by explanation.

Fig: 1