After you have studied Economics in the News, answer the following questions.

a. If both sugary and healthy drinks are taxed at the same rate and if Sam’s drinks budget remains at $30 a month, how does her drinks consumption change?

b. Which tax has the larger substitution effect and income effect: a tax on all drinks or a tax on sugary drinks?

c. Draw a graph like Fig. 3 to illustrate your answers to parts a and b.

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ECONOMIC ANALYSIS Sam has a budget of $30 a month to allocate to both sug- ary and healthy drinks. Both types of drink have the same price, 75 cents per can. With this budget and price, Sam can buy 40 cans of drinks per month in any combination of sugary and healthy. Figure 1 shows Sam's budget line. The government imposes a tax on sugary drinks of 25 cents per can, so the price of a can of sugary drink rises to $1.00. At this price, Sam can afford only 30 cans of sugary drinks per month, but she can still afford 40 cans of healthy drinks. Figure 1 shows how the higher price of sugary drinks rotates Sam's budget line inward. Healthy drinks (cans per month) 40 35 30 25 20 15 10 5 0 5 Budget line with sugary drinks tax 10 1 15 Figure 1 Budget Lines I 20 Budget line before tax 1 1 25 30 35 40 45 Sugary drinks (cans per month)