Suppose the Demand for Good X Can Be Represented by the Following

question 4

Essay

Suppose the demand for good X can be represented by the following equation: Xd = 22 - (1/4)PX. Furthermore, suppose that the demand for good Y can be represented by Yd = 50 - PY.
(A)Find the elasticity of demand for both good X and good Y when the prices of both are $10.
(B)Suppose that an ad valorem tax is placed on both goods. Good Y is taxed at a rate of 5%. To ensure that the inverse elasticity rule holds, what must be the rate at which good X is taxed?
Reminder: Elasticity at a given price is found using the formula s = -(1/S)(P/X), where S is the slope of the demand curve, X is the quantity demanded, and P is the price.

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Definitions:

Pro Forma

A financial statement prepared on the basis of some assumed events and transactions that have not yet occurred.

Net Fixed Assets

The value of a company's property, plant, and equipment minus any accumulated depreciation, representing the actual value of the company's fixed assets.

Sales Increase

A rise in the volume or value of goods and services sold by a business over a given period.

Total Fixed Assets

The combined value of all long-term physical assets owned by a company, which are used in the production or supply of goods and services.