Question

In 2015, the city of Berkeley instituted a tax on sugar-sweetened sodas. Suppose that the tax increased the price of a typical soda by 10 cents. Before the tax, residents in total consumed roughly 150,000 sodas per day (around 1.25 sodas per person), and consumption dropped to half that level, 75,000 sodas, by 2017. What was the per-day compensating variation of the tax

Answer 1

Answer:

(g) Between 0 and -S7.5k because residents can substitute to other products

Explanation:

Data given in the question

Increase in price of typical soda = 10 cents

Total consumed = 150,000 sodas [er day

Dropped quantity = 75,000 sodas

So by considering the above information, the per day compensating variation of the tax varies from 0 and - 7,500

Since the sugar sweetened sodas is treated as a normal goods. Moreover, people can substitute the other goods also if there is an increase in a price of the good

The -7,500 is come from = (-75,000 × 0.10)

The options are as follows

(a) Greater than -$15k because soda is a luxury good with income (b) -$15k because that is the old consumption level times the value of the tax (c) Between -S7.5k and -$15k because soda is a luxury good elasticity > 1 with income elasticity >1 (d) Between -$7.5k arti -$15k because residents can substitute to other products (e) -$7.5k because that is the new consumption level times the value of the tax ()-$7.5k because that is the change in consumption times the value of the tax (g) Between 0 and -S7.5k because residents can substitute to other products (h) Between 0 and -$7.5k because because beverages are typically necessity goods with 6) Nothing because there was no effect on income G) It is impossible to say without knowing consumers' marginal rate of substitution income elasticity less than 1