Wed 19 Dec, 2018 02:20 pm
Choco Cookies sell for $40/box, of which $10 consists of tax, and 66,666 boxes are sold every year. The price elasticity of demand for Choco Cookies is -4. All other cookies sell for $30/box (including a $10 tax), and 40,000 boxes are sold every year. The cross-price elasticity of demand for other cookies, with respect to a change in the price of Choco Cookies, is 0.5. The government raises the tax on Choco Cookies from $10 to $11 per box, all of which is passed through to the consumer in the form of higher prices. Calculate the change in total government revenue. Should the government raise the tax? Why or why not? Explain your answer.