Question

World famous Burpee Beer is brewed in the small town of West Burpee. Curently, the town of West Burpee levies a $2 per-case tax on all Burpee Beer, and the brewery sells 20,000 cases a year at a total price of $20 per case. The mayor of West Burpee has decided to erect a statue of himself in the town square at a cost of $20,000 and wants to raise the money from additional tax revenue from sales of Burpee Beer. He has asked each of the three town council members to come up with a plan to raise the additional $20,000, and their plans are as follows: Council Member Simpson advises increasing the per-case tax by $1, Council member Milhouse advises raising the tax by $2 per case, and council member Flanders advises reducing the current tax by $0.50 per case.

For each of the three council member's plans, determine the following:

a. How many total cases of beer would need to be produced in to increase tax revenue by exactly $20,000?

b. What is the price elasticity of demand for Burpee Beer if the tax revenue increases by exactly $20,000?

c. How much total revenue will Burpee Beer receive if the tax revenue increases by exactly $20,000?

Answer 1

a)

Simpons 60,000 / 3 = 20,000

Milhouse 60,000 / 4 = 15,000

Flanders 60,000 / 1.5 = 40,000

b)

Simpons zero

Milhouse -3

Flanders -26.333

c)

Simpons 20,000 x 21 = 420,000

Milhouse 15,000 x 22 = 330,000

Flanders 40,000 x 19.5 = 780,000

Step-by-step explanation:

a) we divide the required amount over the tax increase/decrease

current tax revenue:

20,000 x 2 = 40,000

required revenue 40,000 + 20,000 statue = 60,000

b) we divide the increase in price over the increase in quantity

`(q_1-q_2)/((q_1+q_2)/(2)) /(p_1-p_2)/((p_1+p_2)/(2))`

Simpson q1 - q2 = 20,000 - 20,000 = 0 then then elasticity is zero.

Milhouse:

`(20,000-15,000)/((35,000)/(2)) /(20 - 22)/((42)/(2))`

elasticity = -3

Flanders:

`(20,000-40,000)/((60,000)/(2)) /(20 - 19.5)/((39.5)/(2))`

elasticity = -26

c) we multiply the amount produced by the price after taxes.