Calculate what the new equilibrium quantity in the market

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Reference no: EM132292618

You have been hired by the mayor of Austin to provide sage economic advice. The mayor would like to implement a tax on large fountain soda drinks of $0.80 per drink which the buyers will pay when purchasing the drink. At the moment soda lovers currently consume 1 million fountain drinks per year in the city (equilibrium quantity). You are given some data on both demand and supply curves. For every $0.10 increase in the price of fountain drink, the quantity demanded falls by 60,000. For every $0.10 increase in the price of fountain drink the quantity that suppliers are willing to sell rises by 20,000. The mayor tells you that the $0.80 tax will generate revenue of 800,000 for the city and that the price of fountain drinks will rise by the tax amount ($0.80). The mayor is incorrect. Explain why they are incorrect by:

A. Explain why it is impossible that the new tax will increase the price the consumer pays by the full amount of the tax. (Sketching a small graph might be helpful)

B. Calculate what the new equilibrium quantity in the market for fountain drinks in Austin after the tax is implemented

C. Calculate the correct increase in the price of fountain drink at the register for the buyer after the tax

D. Calculate the correct amount of tax revenue that the city will collect.

Reference no: EM132292618

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