You are an economist in the Internal Revenue System and just heard of a plan to increase the sales tax on a certain widget by $.06. Last year customers purchased about 10 million widgets. The demand curve in the last year was such that a $.01 increase in price decreases sales by 100,000. A study showed that a $.01 increase in price resulted in producers willing to provide 50,000 more widgets to the market. Congress stated that this $.06 tax will increase government revenues by $600,000 and raise the price of each widget by $.06. Is this correct? If so, explain why this is the case and, if not, what is the increase in prices and revenues?

You are an economist in the Internal Revenue System and just heard of a plan to increase the sales tax on a certain widget by $.06. Last year customers purchased about 10 million widgets. The demand curve in the last year was such that a $.01 increase in price decreases sales by 100,000. A study showed that a $.01 increase in price resulted in producers willing to provide 50,000 more widgets to the market. Congress stated that this $.06 tax will increase government revenues by $600,000 and raise the price of each widget by $.06. Is this correct? If so, explain why this is the case and, if not, what is the increase in prices and revenues?

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter5: Elasticity Of Demand And Supply

Section5.A: Appendix: Price Elasticity And Tax Incidence

Problem 3AQ

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