1.) Suppose that the university has convinced the city to impose a tax on every 12 OZ cup of coffee sold on campus in an attempt to curb caffeine addiction. The university hopes to reduce consumption by raising coffee prices, and so it imposes a $1 tax on all producers for each coffee sold. Let daily demand for 12 OZ coffees (without a tax) be given by
Qb=5000-1000·P
and daily supply (without a tax) is given by
Qs=1000·P
(a.) Compute equilibrium price, quantity, consumer surplus, producer surplus, and total surplus without the tax, and include a plot. Now compute the price paid by consumers and the price received by producers when a $1 tax is imposed on producers, and compute consumer surplus, producer surplus, tax revenue, total surplus, and DWL after the tax. Include a graph with the price paid by consumers on the y-axis (so the tax causes the supply curve to shift but not the demand curve). (Hint: Use the equation Ps = PD - tax to get supply in terms of PD·]
(b.) Compute PED using the demand curve above evaluated at equilibrium quantity without the tax, and the quantity with the tax computed in (a.) (this gives two points on the demand curve). Also compute the PES using the supply curve given above evaluated at the equilibrium quantity without the tax, and the quantity with the tax computed in (a.) (this gives two points on the supply curve). Be sure to use the midpoint formula. Based on these elasticities, who should bear the greater burden of the tax? Who actually does according to your computations of CS and PS in (a.) with and without the tax?
(c.) Suppose the university uses the tax revenue from the coffee-tax on a coffee addiction treatment program. Suppose that the addiction treatment program is working and has reduced demand, so that the new demand curve is given by Qb=3000-1000*P
What is the new price paid by consumers, price received by producers, and quantity traded, assuming the tax of $1 is still imposed? What is the new tax revenue? Include a graph with the price paid by the consumer on the y-axis (so the tax causes the supply curve to shift but not the demand curve).
(d.) Is there a tradeoff between the goals of reducing consumption directly through a tax, and also indirectly by using tax revenue for caffeine addiction treatment? [Hint: Think about what you expect to happen to demand now that tax revenue (and thus money for the treatment program) has changed as a result of the demand shift in c.).]
2.) Consider a consumer with a budget of $10, and assume that there are only two goods, coffee and bagels. Assume that the price of coffee is $2 per cup and the price of a bagel is $1 per bagel.
(a.) Draw the budget constraint with coffee on the x-axis and bagels on the y-axis and give the budget constraint in slope-intercept form.
(b.) Suppose that now a tax is imposed on coffee which increases price of coffee to $3. Include the new budget constraint with the tax on your plot in (a.) and give the constraint in slope-intercept form.
(c.) Do you think that the consumer is worse off, better off, or the same as a result of the tax? Why? Could the consumer be unaffected?
(d.) Do you think that the consumer will consume more or less coffee than before the tax? What about bagels? Explain with graphs. If you were a bagel producer, do you think that you would be in favor or against the tax on coffee? Why?
3.) We have discussed ways in which the government can intervene in markets in order to affect market outcomes such as with price floors and ceilings, quotas, and taxes. One might interpret interventions such as these as central planning. Read "The Use of Knowledge in Society", by F. A. Hayek who discusses information in society and also central planning, and answer the questions below.
(a.) Based on what you read, would Hayek be for or against government interventions (i.e., central planning) such as price floors and ceilings, quotas, and taxes like the ones discussed? Which lines in the article support your argument?
(b.) Using insights from Hayek's writing, what important details are missing in the "chalk board" model analyzing the effects of a tax in Question 1.) above?

1.) Suppose that the university has convinced the city to impose a...