Problem
1. Lola thinks cola and club soda are equally delicious. She is always willing to trade one litre of cola for one litre of club soda.
(a) Draw some of Lola's indifference curves, which characterize her preferences for these two goods.
(b) Cola costs $1.50 per litre and club soda costs $3.00 per litre. If Lola spends S12 per week on beverages, write out her budget constraint mathematically and illustrate.
(c) How much cola will Lola buy? How much club soda? Illustrate.
2. A World Health Organization study identified consumption of high-fructose corn syrup in products such as cola as a cause of obesity and other health problems. It suggested imposing a fat tax on these high-calorie, low-nutritional content foods.
(a) How would a $0.50 per litre tax on cola affect Lola's budget constraint? Show this on the diagram from question (1). How much cola does she buy after the tax?
(b) How much revenue would a S0.50 per litre tax raise? Show the revenue from the tax on the diagram.
(c) How would a $2.00 per litre tax on cola afect Lolas budget constraint? The amount of cola that she would buy? Draw a new diagram for this part of the question.
(d) How much revenue would a S2.00 per litre tax on cola raise?
3. Draw a graph with the tax rate on cola on the horizontal axis and the total amount of tax revenue raised on the vertical axis. Use your answers from above, as well as a few other points (say a tax of zero and a tax of $1.49) to estimate the relationship between the tax rate and the amount of revenue raised. This is often called a "Laffer curve".
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.