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

1) The brewery will be required to increase the production of beer in order to cover the cost of $20,000; thus will have to raise 1,000 cases in order to cover the $20,000 for the statue which was erected by the West Burpee's mayor

Working:

Simpson plan: (20,000 X 1) = $20,000 (20000 case)

Milhouse plan: (10,000 X 2) = $20,000 (10000 cases)

Flanders plan: (40,000 X 0.5) = $20,000 (40000 cases)

2) Price elasticity calculation is as below　

Simpson plan: [0 / 20,000 X 2/1] = 0

Milhouse plan: [10,000 / 20,000 X 2/2] = .5%

As per Flanders plan: [20,000/20,000 X 2/0.5] = 4%

　

3) Additional Revenue earned when the tax revenue rises:

Total Revenue earned at a tax of $2: [20,000 X 20] = $400,000

Total Revenue Earned when the tax revenue rises by $20000: [400,000 + 20,000] = $420,000