4) Beach Economics (35 points)

When our children were young, their favorite beach was Ocean City, New Jersey. Here a micro question in honor of the economics of the Jersey Shore.

For the better part of a century, when the air gets humid and muggy, Philadelphians head for the Jersey Shore. This past July, Rocky and Adrienne from South Philly headed for the resort town of Wildwood, New Jersey.

The moment they cross the bay, Rocky always stops at Fralinger Sweet shop to stock up on Chocolate Fudge and Salt Water Taffy (a sweet made of only sugar). Last July, the fudge cost $10/pound and the taffy cost $5/pound. Rocky had $50 to spend on fudge and taffy. His utility for fudge and taffy corresponds to the following equation:

Utility = F3/4 T1/4

a). New Jersey decides to place a sin tax on all goods that have over 50% butter fat. That includes a tax on fudge. You should note that the demand for fudge is relatively elastic. Show and graph the effect of this tax in a supply and demand framework detailing any changes to efficiency. Who will end up paying the vast majority of this tax? (10 points)

b). Sketch out Rocky's budget constraint and some hypothetical indifference curves before the fudge tax. (5 points)

c). Show the effect of the fudge tax, then explain and graph how a tax and rebate scheme would work for fudge consumers. Why might a government adopt such a plan? (10 pts)

d). If New Jersey just wanted revenue for the government and was not interested in changing behavior, explain and graph how New Jersey could take the same size tax from a representative consumer and still provide those consumers more utility. (10 points)