Suppose the demand for cans of soda is given by the function D(p) = Q^D = 120 â p while the supply for cans of soda is S(p) = Q^s = 2p where Q is measured in millions of cans and p in cents. Suppose that the government wants to subsidize health insurance premiums for consumers. It proposes a tax on cans of soda to fund this subsidy. Suppose the tax is 15 cents per can.
Required:
a. Calculate the equilibrium price and quantity before the tax is levied. What are CS, PS, and DWL at the equilibrium?
b. Calculate the equilibrium price and quantity after the tax is levied. What are CS, PS, G (government tax revenue), and DWL at the equilibrium?
c. Suppose a new study comes out that says that soda is really bad for you. The government changes their mind and sets the tax rate at 75 cents per can. Redo part (2) with this tax rate.
d. Assume consumers receive all the value of the tax revenue, so their welfare is CS+G. Is a tax of 0, 15, or 75 best for consumers? Explain.
Answers: 2
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Suppose the demand for cans of soda is given by the function D(p) = Q^D = 120 â p while the supply f...
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