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:

Spiracles

Small openings found on the surface of some animals, such as insects and spiders, that lead to their respiratory systems.

Gills

The respiratory organs of aquatic animals that extract dissolved oxygen from water and release carbon dioxide.

Respiratory Gases

Gases involved in the process of respiration, primarily oxygen (O2) for inhalation and carbon dioxide (CO2) for exhalation.

Spiracles

Small openings on the surface of some animals, such as insects, that allow air to enter and exit the respiratory system.