A product with infinite elasticity of supply has sales of 1000 units a week at a price of $1 per unit. Price elasticity of demand is 1.5 over the relevant range. The government imposes a tax of 10%. What will be the government’s weekly tax revenue? 🥇

  Economy

Answer:

Your own answer is absolutely correct, it’s really $85 per week. To get the right answer you need to know that since supply is elastic then the producer’s price will be $1 fixed. It means that only the consumer must pay the tax so his price rises to $1.10. Now let’s take into account the demand elasticity which is -1.5. If we increase price by 10% then we’ll see 15% decrease in demand (850 units). All there’s left to do is just apply 10% to the sales price and get the answer: $85.

It’s easy!

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