Question

in the city of sweetwater, a large two-liter bottle of sparkly (a currently untaxed sugary soda) sells for $4.00 per bottle. 100,000 of those large two-liter bottles of sparkly are purchased in sweetwater each year. the sweetwater city council is informed that for this product the price elasticity of demand (e) is exactly 2.0. councilmember prudence refrain, hoping to both discourage residents from consuming sparkly and collect some tax revenue to fund health-awareness programs, proposes charging consumers a new 4% sales tax per bottle of sparkly sold in the city. sellers would keep the base revenue ($4.00 per bottle) but would have to transfer to the city all the additional revenue paid under the tax by the buyers of sparkly. assuming that the demand response to the increased out-of-pocket expense ($4.00 per bottle plus the tax) is immediate, and that the tax is cost-free for the city to enforce and 100% effective, how much tax revenue per year should councilmember refrain expect the city to collect?

Answer 1

The tax revenue per year that Councilmember Prudence Refrain should expect the city of Sweetwater to collect from the sales of sparkly is $16,000.

Step-by-step explanation:

The tax revenue per year that Councilmember Prudence Refrain should expect the city of Sweetwater to collect can be calculated by multiplying the sales tax rate by the quantity demanded and the price of each bottle of sparkly. In this case, the sales tax rate is 4% or 0.04, the quantity demanded is 100,000 bottles per year, and the price of each bottle is $4.00. Therefore, the tax revenue per year would be:

Tax Revenue = Sales Tax Rate × Quantity Demanded × Price
Tax Revenue = 0.04 × 100,000 × $4.00
Tax Revenue = $16,000

Therefore, Councilmember Prudence Refrain should expect the city of Sweetwater to collect $16,000 in tax revenue per year from the sales of sparkly.