Economics Homework 1.5

| March 13, 2016

Homework 1.5
(13 points)
1. (5 points) Suppose the state government imposes a new 20 cent tax per 12 ounce can of soda
or equivalent sold in retail outlets.
a.

What impact would this have on consumer surplus from soda consumption?

b.

What impact would this have on producer surplus from soda sales?

c.

What impact would this have on state tax revenue, assuming no tax is currently
imposed on soda sales?

d.

Compare the revenue collected by the government to the loss of producer and consumer
surplus (the sum of the two). Which is greater?

e.

Who would bear more of the burden of the soda tax if the demand for sodas is elastic,
consumers or producers? Explain.

2.

(8 points) Consider a binding price floor for labor as shown below.
a.

Label the quantity exchanged under the price floor as QF.

b.

What happens to consumer surplus under a price floor? That is, does it increase,
decrease, or is the impact ambiguous? Label the area of the graph that represents this
change in consumer surplus.

c.

What happens to producer surplus under a price floor? That is, does it increase,
decrease, or is the impact ambiguous? Label the area of the graph that represents this
change in producer surplus.

d.

What area of surplus is transferred between producers and consumers and who gains it
(producers or consumers)?

e.

What area represents the deadweight loss of the price floor?

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