Question

At a price of $3 each, Dave (a typical New Yorker) drinks 200 44-ounce sodas each year. Concerned about burgeoning obesity, the Mayor of New York proposes a $0.50 tax on such drinks. He then proposes compensating consumers for the price increase by mailing each consumer a $100 check each year.   

(a) What will happen to Dave’s consumption of soda? Show using an indifference curve diagram with soda on the horizontal axis and a composite good (price = $1) on the vertical axis.

(b) Will Dave be better off, worse off, or indifferent to the change? Explain using your diagram.

(c) In terms of revenue, will the government be better off, worse off, or indifferent to the proposal? Explain.

Answer 1

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