The Maxwell School

Syracuse University

Syracuse University

Seattle recently considered a new $0.10 tax on beverages containing espresso. Suppose that Seattle residents currently drink 30 million shots of espresso per year, and that an espresso drink costs $2.50.

- If the supply curve is perfectly elastic, what would be the effect of the tax if the elasticity of demand is -0.5? Calculate the following: the change in the price and quantity of espresso drinks; the change in consumer and producer surplus; the revenue raised by the tax; the deadweight loss; and the deadweight loss per dollar of tax revenue.
- The elasticity of demand for espresso is not known precisely. What would the effect of the tax be it the elasticity of demand were much higher, say -2.0 instead?
- Now suppose the supply curve is perfectly
*in*elastic. Calculate the effect of the tax under that circumstance. Discuss how this case would differ from the previous two.

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URL: https://wilcoxen.maxwell.insightworks.com/pages/261.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 08/17/2016

URL: https://wilcoxen.maxwell.insightworks.com/pages/261.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 08/17/2016