Brawndo has a constant marginal cost of production of S2 a unit. It sells Brawndo to Vespucci at a wholesale price of w per unit. Vespucci, in turn sets the retail price of p per unit and faces a demand curve of 40-4 Brawndo moves first and chooses w. Then, Vespucci, knowing w chooses p. Each operates so as to maximize its own profit. 1. What are the profit maximizing choices of w and p?
2. A local government is unsure of the health claims promised by Brawndo's founders, so it decides to author a study. The study will be funded by a 5% tax on the sales price of Brawndo. The Government must decide whether to impose the sales tax on Vespucci (i. e. at the retail level) or on Brawndo (at the wholesale level). Proponents of the tax say it does not matter.

a. Suppose the tax is imposed on Vespucci's retail price. What is the adjustment inw and p that Brawndo and Vespucci will make to maximize their respective profits?
b. Suppose the tax is imposed on Brawndo's wholesale price. What is the adjustment in w and p that Brawndo and Vespucci will make to maximize their respective profits?
c. Which of the two polices will reduce consumption of Brawndo more?
d. Which of the two policies will generate the most tax revenue?