Suppose That the Market for Large,64-Ounce Soft Drinks in the Town

question 24

Multiple Choice

Suppose that the market for large,64-ounce soft drinks in the town of Pudgyville is characterized by a typical,downward-sloping,linear demand curve and a typical,upward-sloping,linear supply curve.The market is initially in equilibrium with 1,000 soft drinks sold per day.The newly-elected Mayor of Pudgyville wants to tax 64-ounce soft drinks.She is considering either a $0.10 tax or a $0.30 tax.Her chief economic advisor estimates that the number of soft drinks sold after a $0.10 tax will be 900 and after a $0.30 tax will be 500.Which tax is better?

• A)The $0.10 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.30 tax.
• B)The $0.30 tax is better because it raises more revenue and creates a lower deadweight loss than the $0.10 tax.
• C)It is not clear which tax is better because although the $0.30 tax raises more tax revenues,it creates a larger deadweight loss than the $0.10 tax.
• D)It is not clear which tax is better because although the $0.10 tax raises more tax revenues,it creates a larger deadweight loss than the $0.30 tax.

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Definitions:

Traditional Format Income Statement

A financial statement that shows a company's revenues, expenses, and profits, typically starting with sales and subtracting cost of goods sold and other expenses.

Merchandise Inventory

The total value of goods held by a company for the purpose of resale.

Selling Expenses

Expenses directly related to the sale of goods or services, like marketing expenses and wages for sales personnel.

Administrative Expenses

Costs related to the general administration of a business, such as salaries of senior executives, legal and accounting services.