Imagine a company, A, that sells goods through its physical stores as well as an online trading

platform. Initially there is no sales tax on goods irrespective of whether they are sold through online

or physical stores. Then assume the government imposes a sales tax of $2 per unit of the good

(assuming a fixed amount of tax) only on goods which are sold at the physical store. The company

collects the following data on its sales, which is provided in the following Table 1:

Table: 1

Price per unit of goods

at Physical store

Quantity sold at

physical store

Quantity sold via online

at price $7 per unit (as

they are not subject to

sales tax)

Before sales Tax

$7

3

6

After sales Tax

$8

2

8

a. Calculate the own price elasticity of demand for the quantity sold at the physical store?

5 points

b. Based on your results to part (a), do you think consumers who purchased at the physical store

are responsive to the sales tax? Explain.

3 points

c. Calculate the total revenue of company A before and after the sales tax. Does the sales tax affect

company A's total revenue? Explain.

7 points

d. Calculate the cross-price elasticity of the. quantity sold online with respect to the price per unit

of goods sold at the physical store. Use your answer to explain what cross price elasticity measure

indicates.

5 points

e. Now suppose Table 1 provides us equilibrium price and quantity, then draw a demand and supply

diagrams for the market of company A's physical store as well as its online store. Name and fully

label your diagram including both axes and indicate and explain points of interest using P for

price (P1, P2 etc) and Q for quantity (Q1, Q2 etc). Hints: For simplicity assume that supply curve is

upwardly sloped, and the diagrams are consistent with Table 1