<?xml:namespace prefix = o ns = \"urn:schemas-microsoft-com:office:office\" /> T

Question

<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The following present select elasticity of demand elasticity of demand estimates: Barnes & Noble books = - 4.00, Coca-Cola = - 1.22, Cigarettes = -0.25, Beer = -0.23, Gasoline = -0.06.

Using the elasticity estimates in the table above, classify the price elasticity demand as elastic or inelastic. Explain your reasoning.

Explain the implications of those classifications on tax revenue collections when the per-unit tax increases as opposed to decreases.

Using those classifications, make some assumptions regarding tax incidence. For instance, will buyers or sellers pay a larger portion of the tax per unit? Explain.

Conclude, based on the elasticity classifications, their effect on tax revenue and tax incidence, and which goods the government would prefer to tax.

Explanation / Answer

1.Barnes & Noble books - inelastic
-4.00
Coca-Cola - inelastic
-1.22
Cigarettes - Inelastic
-0.25
Beer - Inelastic
-0.23
Gasoline - Inelastic
-0.06

2. In this case, the government receives more tax revenue when demand is inelastic and less when elastic. They actually lose money when demand is elastic

3. The products that are inelastic has the trend of tax burden shifted upon the consumers and elastic demand shows trends of tax burden mostly taken by sellers. Barnes & Noble books and Coca-Cola tax will be mostly be paid by consumers. The more negative the number the more inelastic it is.

4. The lower the demand of the product the higher the revenue and tax are earned. Knowing this, the government should tax the products with the most inelastic demand (Barnes & Noble books and Coca-Cola).

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.