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Microeconomic Analysis

In: Business and Management

Submitted By fj18
Words 717
Pages 3
Project 1

The purpose of this report is to investigate the impact of a proposed excise tax on consumers and the relevant industry. More specifically, this report discusses a proposed 1% “fat” tax (i.e. an excise tax) on a brand of soda and the resulting effect on its customers as well as the supermarket chain that distributes the soda. Using calculations derived from the demand function provided, this report analyzes the proposed excise tax and argues that an income tax, rather than an excise tax, would be a better alternative for the government to generate the same amount of tax revenues as the “fat” tax. In order to comprehend the situation at hand, one must have a basic understanding of the elements of demand, optimal output, price and revenues. Demand, along with supply, is the determining factor of the prices and quantities of goods that are bought and sold in the market. To take this case as example, demand illustrates the quantity of soda consumers would like to purchase at each price. Optimal output refers to the amount of soda produced that will maximize the supermarket’s level of profits. In terms of price, it is the amount of money that the consumer must spend to obtain one unit of soda. Knowing the price and the quantity of soda sold will allow one to obtain revenue, which is the income received by the supermarket from the sale of soda. According to the calculations done given the demand function, the pre-tax soda output is 29469 oz. at a price of $0.017037 or 1.73 cents which would generate revenue of $502.05.
Imposing the proposed tax would influence the optimal revenue maximizing price and units of soda sold which would then impact the amount of revenues generated. Knowing that it is a 1% “fat” tax, post-tax optimal price is calculated to be $0.0172 or 1.72 cents and the post-tax optimal soda output would be 29174.31 oz. The total tax revenue...

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