Concerns about the size of the federal budget deficit are likely to prompt Congress to search for new sources of tax revenue to reduce the deficit. One idea for simultaneously raising tax revenue and reducing health care costs is to tax various "junk food" products such as soft drinks (see attached articles titled "Mexico to Try Taxes to Combat Obesity" by Amy Guthrie and "Coke Didn't Make America Fat" by Muhtar Kent, Coca-Cola's CEO, written in opposition to taxing soft drinks).

The purpose of this homework assignment is for you to analyze the incidence of a hypothetical excise tax on soft drinks and its impact on the tax revenue collected by the government. The homework is worth 14 points and is due Wednesday November 2. Be sure to read the appendix to Chapter 5 and review the excise tax handout used in class before starting this homework assignment.

Attached are two diagrams depicting the market for soft drinks. In the two diagrams, the market supply of soft drinks is exactly the same, but the market demand for soft drinks has a different elasticity with respect to price. If an excise tax equal to $1 per liter is levied on soft drink sellers, please answer the following questions for Case #1 and Case #2.

1. Case #1:

a. The new equilibrium quantity of soft drinks bought and sold would be ____________ million liters.

b. The new equilibrium price paid by buyers of soft drinks would be $__________ per liter.

c.The new equilibrium price received by sellers (after tax) would be $__________ per liter.

d. Buyers would spend a total of $__________ million on soft drinks.

e. Sellers would receive a total of $__________ million (after tax) from selling soft drinks.

F. The government revenue from this tax would be $__________ million.

G. $__________ million of this revenue would be paid by buyers in the form of higher prices.

H. $__________ million of this revenue would be paid by sellers in the form of reduced income.

2. Case #2:

a. The new equilibrium quantity of soft drinks bought and sold would be ____________ million soft drinks.

b. The new equilibrium price paid by buyers of soft drinks would be $__________ per liter.

c. The new equilibrium price received by sellers (after tax) would be $__________ per liter.

d. Buyers would spend a total of $__________ million on soft drinks.

e. Sellers would receive a total of $__________ million (after tax) from selling soft drinks.

f. The government revenue from this tax would be $__________ million.

g. $__________ million of this revenue would be paid by buyers in the form of higher prices.

h. $__________ million of this revenue would be paid by sellers in the form of reduced income.

\fSOFTDRINK MARKET (CASE # 2 ) $2,50 $1:50 PRICE OF SOFTDRINKS ($/ Liter) $1,02 + 3, 504 D O 2 3 4 5 6 7 8 9 10 16 12 13 14 15 16 17 18 19 20 QUANTITY OF SOFTDRINKS ( In millions of liters)