Question

6. (10 pts.) Assume you are the manager of Faygo (Michigan's own soft drink!), where the monthly demand for Faygo at the local gas station is QD = 600 – 800P and the supply function (including sales tax) is Q$ = 600P – 100. a. Solve for equilibrium price and quantity at the local b. After seeing the most recent health statistics, Michigan's congress realizes Michigan residents have a problem with obesity. Wanting to do their part to fight obesity, congress decides their best option is to place a tax on sugary drinks. They decide to impose an excise tax of $0.10 on each soft drink sold in Michigan. How will the imposition of the sugar tax impact the equilibrium price and quantity of your product? c. Are you happy about this new tax? Explain. d. If the Michigan soda lobby convinces congress not to impose this tax on Michigan-made products (i.e., still taxing Coca-Cola and Pepsi products), how do you expect this to affect the equilibrium price and quantity of your product (no explicit number needed)? Explain. station. gas

Answer 1

The demand bor faygo at the lo cal matily Jas stakon s Qp= 60- 800P and the Supply burction Cincleding Sales fae) is 6o0p-100 2 Equilibuium occums where demand equals Supply or where 600-800P= 600P-100 Now, -1400P= -700 =D) P =$0.S and eq uilibaium quantity Gn be band by Subshituding Pz f0.S in either dewand or Supply equation. Huce Q0=600-8o0 p Q= 600-800(0.5) or Hmce equilibrium puice is $ 0.5 pu Sobt drink equilibrium quautity is 200 uai'ts Sobt Arinks of Nows lonitially Q0=600-800p when Q0=0 =) 0=600-800p P=0:75 P=0 =) When CS Scanhed with Campcanner

ALSO, suppey equations Also, as=60P-1o0 Qs= -160 as=0 =) when PEo =) when 0= 600P-10 p_f0.166 e Can now driaw the demand and supply cmvsir 6.6 O'S :0.5 o'l6 -p سم 200 400 Now, quartity supblicd equation as = 600.P.-l0.10 =600P ) 0.0016 QS +0.166 = NOw af tn the imposition of au encise fan v-8o.10 on each sobt drink sold es nodion wil beir new Suppy in Michi higan, P=0:0016Qsto·166+0.1O O- oo16 Qs t Oi 266 --(1) csanned with damScanner

And demand eg uaton wi'll be.- Q=600-800p =) 600.Q= gop > O.75- 0. 00125 Q =P - 72) Now. equating equation (4) and (2V we qet ? 0.75-0.00/25Q 0:0016 Q5to:266 O:00295Q = 0.484 169.8 uuitS Here Price thaf Producus receive will be fownd by subrditating Pre- taned o supply equation Q= 169.8 uits iù the i.c. Qs =600P -|0 %3D -2 169.8=6oop-lo0 p2$0449 |and pice thaft by substituking oe9.92 Suffly cuaud con Suees Ś paj will bbe bond fo4s în the taued Cunve p:0.0016Qst o.266 E 0.0016:(169 .8) +0:266 $0.54 CS Scanned with CamScanner

Hnce now the equi li briem quantity will be 169.9 units aud equilibiompuće will be and pice t hat producu s receive is $ 045 pu Sobt drink $0.5 As a manages of Faygo I ay not ha ppy withe this new fan because pice ie. $ 0.4S Pu soft drink wwi En is lown f han the pùce Soft drink neciving lown before taa i.e $05 pn 9t the michigun Soda lebby con vinces Conquers noe to im þose ths Aae on Products, then peop le Lothen taned brand Su ch as to Michig müchigan- made will switch from Coca -o la, pepsi made products as the eg_ui libri um made products ic 70'5 than t he other taxed branded price for michigan will be liown produck. Huce the demonel cunve for michigan made products will Shif t nightward and equilibeiom Sranned with ce Qud quant' fy will nise'. HScanner