Richard and Henry like soda drinks. Henry's demand for soda is: P=10-Q; the demand for Richard is P=5.5-0.5Q. The supply of soda cans is perfectly elastic at P=1. The government imposes a tax on soda cans equal to t=$1 per can. a) Which consumer will suffer the greater loss of consumer surplus in response of the tax? why? b) Would the government prefer all consumers to be like Henry or like Richard if the government wants to maximise tax revenue? Why? Accompany your answer with a diagram to illustrate your argument.

Richard and Henry like soda drinks. Henry's demand for soda is: P=10-Q; the demand for Richard is P=5.5-0.5Q. The supply of soda cans is perfectly elastic at P=1. The government imposes a tax on soda cans equal to t=$1 per can. a) Which consumer will suffer the greater loss of consumer surplus in response of the tax? why? b) Would the government prefer all consumers to be like Henry or like Richard if the government wants to maximise tax revenue? Why? Accompany your answer with a diagram to illustrate your argument.

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter5: Elasticity Of Demand And Supply

Section5.A: Appendix: Price Elasticity And Tax Incidence

Problem 1AQ

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