A small town has two price-taking firms - a soda producer and a carrot farmer. Demand for soda is given by Ds (p) = 180 2p and supply is S s (p) = 2p 20. Demand for carrots is given by Dc (p) = 180 2p and supply is S c (p) = 2p 20.

(a) Find the equilibrium prices and quantities for both goods.

(b) Calculate producer and consumer surplus in both markets.

(c) The mayor is a close friend of the carrot farmer and would like to help out his buddy by subsidizing carrots. He proposes a subsidy of 5 dollars on every unit of carrots purchased. In order to finance this subsidy, he decides to levy a tax of $T dollars on each unit of soda. How big does the tax T need to be on soda to balance the budget?

(d) Find the new equilibrium prices and quantities for both goods under the tax and subsidy policy. Calculate the consumer and producer surplus.

(e) The mayor presents the policy to the city council, who is worried that the tax may harm consumers. The mayor argues that the policy won't affect consumers, since the tax is offset by an equal-sized subsidy on carrots. Do these calculations support the mayor's argument? Explain intuitively why or why not.