The government of a state has been experiencing an increase in number of obesity cases. Research...

The government of a state has been experiencing an increase in number of obesity cases. Research suggests an increase in consumption of a particular fast food item is responsible for high number of obesity cases. As a result, the government of that State is considering an imposition of $1 tax. Monthly demand and supply for this good are QD=21-1P and QS= -1+1P respectively.

a) Draw the demand and Supply curve for fast food before the tax is imposed. Calculate the

equilibrium price and quantity, consumer and producer surplus, and label them on the graph.
b) Calculate the price elasticity of demand and supply for fast food. If the State government

imposes a tax, who will bear the most of the burden of the tax?
c) Suppose that the State government finally imposes a $1 tax on fast food. What will the new

equilibrium price and quantity? Include the tax on your graph. Calculate the consumer and

producer surplus and label them on the graph.
d) Is there any deadweight loss resulting from the tax on that good? If so, calculate it and if not,

explain? Would you personally advice the State government to impose the tax or not?

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Expert Solution

Rahul Sunny answered 1 year ago

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