Question

1. Walmart sells $200,000 each day per store. Average combined state sales tax rates nationwide are 8.5%. If Walmart’s E^d is estimated at 0.72, how much more in sales would each Walmart store average per day if their customers did not have to pay that tax?

Answer 1

The tax is equivalent to a 8.5% increase in price (assuming consumers bear full tax burden).

Elasticity = % Decrease in quantity / % Increase in price

0.72 = % Decrease in quantity / 8.5%

% Decrease in quantity = 0.72 x 8.5% = 6.12%

Let quantity in absence of tax be Q units. Then, after tax, quantity will decrease by 6.12%.

Initial revenue (R0) = P0 x Q0

New revenue (R1) = P1 x Q1 = (1.085 x P0) x (0.9388 x Q0) = 1.018598 x (P0 x Q0) = 1.018598 x R0

R1 = 1.018598 x $200,000 = $203,719.6

Increase in revenue = R1 - R0 = 203,719.6 - 200,000 = $3,719.6