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1 Short Questions (7 points each) For each question below, provide a written answer and explain your reasoning. You may also use graphs or equations to support your argument, but this is not necessary. Answers that receive full credit will link the question to the relevant concepts from class. Make sure to answer the question as it is stated.
1. Imagine that New York City is considering a per-unit tax Sr on soda. A city councillor asks whether consumers should pay the tax (meaning consumers will pay Sr per unit of soda to the government, in addition to whatever they pay to producers), or if instead the companies that make the soda should pay the tax. How would you answer the councillor’s question?
2. Another city councillor argues against the soda tax from question 1 because it will cause deadweight loss. What else should the councillor consider before concluding that the soda tax is a bad idea? 3. Suppose the U.S. Congress passes a bill which raises federal income tax rates for all workers. Following the tax increase, everyone continues to work the same number of hours as before. The legislators who supported the bill conclude that since there was no labor supply response to the tax increase, the bill did not cause any additional deadweight loss. Is this conclusion justified? 4. Explain (in words) how incentive compatibility constraints limit a government’s ability to transfer income from richer to poorer households.