1. Taxes on goods which has harmful effects, either on the consumer him/herself (like smoking or drinking alcohol) or to others (pollution), have the pur- pose of discouraging purchases of these goods. The tax-revenue raised could in principle be returned to the buyer, something which is rarely done in practice, at least not directly. However, let's assume that the tax on beer is returned to the consumer, after the purchase, in this case we can isolate the substitution-effect of the price increase due to the beer-tax, from the income effect. We assume that the consumer has a Cobb-Douglas utility function over beer (b) and all other goods (o): U(Qb, Qo)=Q0.01 0.99 ' the consumer's income is initially: Yo = 200000, and the initial goods prices are: p p = 100. (a) Find the demand function for beer and all other goods, the initial quantities demanded and the initial utility. (b) The price of beer in Germany is about half what it is in Sweden, and they have no (or a very low) specific tax on beer. Let's assume that the price of german beer is the (perfectly elastic) supply price without taxes. Since the price that consumers pay in Sweden is twice that price, the specific tax-rate is 100% (or t = 1). Find the quantity demanded in Sweden with a 100% tax on beer, without any refund of taxes. Also find the consumer's utility. (c) Find the necessary income compensation such that the consumer has the same utility as he/she had without a tax. Find the new quantity demanded for beer. (d) Divided the total change in quantity demanded due to the beer tax into a substitution and an income effect. (e) Find the income compensation such that the consumer can buy his/her initial bundle (Slutsky compensation). If this compensations princi- ple is used, is the consumer over- or undercompensated? Explain.