Five Minute Exercises > Using Elasticities to Analyze a Tax

Problem

Given:

A good is initially untaxed and the market equilibrium Q=800
The elasticity of demand is -2.0
The supply is perfectly elastic at W2A = $50

Determine:

The amount of revenue that would be raised by a new $10 tax.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 09/28/2010