Question

9. Draw a tax on soda, assuming relatively elastic demand for soda. Label all the relevant axes, curves, prices (all of them), and quanti- ties as well as the consumer surplus, producer surplus, tax revenue and deadweight loss. Soda 10. Based on your graph, would this tax very effective at reducing the consumption of soda? 11. Suppose this tax is levied on suppliers, meaning they are re- sponsible for paying the government a certain amount for every soda they sell. Who would pay more of this tax, consumers or pro- ducers and why?

Answer 1

9)

New equilibour - Initialequibruin lo Q7 Qo Quantity arl AE p²) = Consumer surplus ar/P EDC) = Tax revenue ParlcDo) a Producer Surplus TarLEDB) = dead weight loss

10)the equilibrium quantity is decreased from Q0 to Q1, while price is just rise from P0 to p1.

So yes this tax vary effective at reducing the consumption of soda.

11)The diagram shows the tax levied on supplier ,so they are selling each quantity at higher price by tax.and supply curve shifts upwards.

CONSUMER burden of tax =new equilibrium price- initial equilibrium price =p1 -p0

Producer burden of tax=tax - CONSUMER burden

Tax=p1-C

Producer burden=p1-C-p1+p0=p0-C

So clearly (p0-C)>(p1-p0),

So producer would pay more of this tax.because supply curve is relatively inelastic while demand curve is relatively elastic.