In the City of Sweetwater, a large, two-liter bottle of Sparkly, a sugary soda, sells for $5.00 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 elasticity (e) is exactly 2.0. Councilmember Prudence Refrayn, hoping to discourage residents from consuming Sparkly and also collect some tax revenue, proposes adding a 5% sales tax per bottle. Assuming that the demand response to the new price ($5.00 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 Refrayn expect the City to collect? Please state your answer in dollars, rounded if necessary to the nearest dollar. For Question 13 below, the formula for the price elasticity of demand provided in class is: %AQD e = %AP where the elasticity e is equal to the percent change in the quantity demanded (% A Qp) divided by the percent change in price % AP), As Cooter and Ulen explain (p.25, footnote 8), e is always stated as a positive number, by convention, even though the percent changes (e.g., quantity- demanded increasing as price decreases, or vice versa, according to the law of demand), divide to a negative. The full expression of that convention is simply the absolute value: %AQD %AP e = Please review Cooter & Ulen on elasticity, and then answer #13 below. In the City of Sweetwater, a large, two-liter bottle of Sparkly, a sugary soda, sells for $5.00 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 elasticity (e) is exactly 2.0. Councilmember Prudence Refrayn, hoping to discourage residents from consuming Sparkly and also collect some tax revenue, proposes adding a 5% sales tax per bottle. Assuming that the demand response to the new price ($5.00 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 Refrayn expect the City to collect? Please state your answer in dollars, rounded if necessary to the nearest dollar. For Question 13 below, the formula for the price elasticity of demand provided in class is: %AQD e = %AP where the elasticity e is equal to the percent change in the quantity demanded (% A Qp) divided by the percent change in price % AP), As Cooter and Ulen explain (p.25, footnote 8), e is always stated as a positive number, by convention, even though the percent changes (e.g., quantity- demanded increasing as price decreases, or vice versa, according to the law of demand), divide to a negative. The full expression of that convention is simply the absolute value: %AQD %AP e = Please review Cooter & Ulen on elasticity, and then answer #13 below
