A state in the southeastern region of the United States operates state liquor st

Question

A state in the southeastern region of the United States operates state liquor stores. Prices at the stores are set in the following fashion: add 41% to the wholesale price at which the system acquires the product. To that is added an excise of $8.10 per case. The state sold roughly 36 million cases. The state, however, increases the excise rate to $9.10 per case, and a tentative revenue estimate shows that excise revenue will increase by $36 million. The state economist objects: “The demand for liquor is inelastic, so sales will be relatively insensitive to a tax increase. Therefore, revenue will increase by more than $36 million.” What is your reaction to this objection?

Explanation / Answer

Answer. Since, the liquor is considered as having inelastic demand which means when the price of liquor increases, then the demand for liquor does not change. It will remain unaffected by the change in price of liquor. So, an increased tax rate would not decrease the demand for liquor rather it would increase the government rax revenue. We are agree with the economist's point. The demand curve for liquor will be vertical on x-axis, shows inelastic demand or demand is unaffected from a rise or fall in price.

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