At a price of $3 each, Yoshi (a typical New Yorker) drinks 200 44 oz. sodas each year. Concerned about burgeoning obesity, the Mayor of New York proposes a $0.50 tax on on such drinks. He then proposes compensating consumers for the price increase by mailing each resident a check for $100.
a. What will happen to Yoshi's consumption of soda? Show, using an indifference curve diagram with soda on the horizontal axis and a composite good (price = $1) on the vertical axis.
b. Will Yoshi be better off, worse off, or indifferent to the change? Explain, using your diagram.
c. In terms of revenue, will the government be better off, worse off, or indifferent to the proposal? Explain.