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ECO406 Mathematical Economics Assignment No. 2 Solution Fall 2019 Due Date: 31st-july-2019

The budget for FY2019-2020 has seen an increase in both direct and indirect
taxes. On one hand, your disposable income will shrink while on the other your
purchases will cost more. The Federal Cabinet has decided that Finance Bill for
the next fiscal year will include measures to prevent illicit trade of tobacco and
impose 'Health Tax' on tobacco and carbonated drinks. Pepsi is a carbonated
manufactured soft drink manufactured by Pepsi co. Pepsi is having 65% market
share in Pakistan that is much more as compared to other competitors. Suppose
the linear demand function and total cost function of Pepsi is given as before the
imposition of tax.
a) Find the profit maximizing price, quantity sold and total profit of Pepsi.
b) Suppose Government of Pakistan decides to levy a health tax of Rs.5 per
unit on carbonated drinks. What will happen to price, quantity sold and
total profit of Pepsi after imposition of this tax?
(MARKS: 4+6)

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