Suppose the demand curve for movie tickets has unitary price elasticity and the supply curve is perfectly price elastic.If 3 million tickets are currently sold at a price of $5,approximately how much tax revenue could the government generate from a $1 specific tax?
A) $18 million
B) $3 million
C) $2.7 million
D) $1.5 million

Question

Quizplus · Accepted Answer

With unitary price elasticity of demand, a 1% increase in price leads to a 1% decrease in quantity demanded. Similarly, a 1% decrease in price leads to 1% increase in the quantity demanded.
Since the demand for tickets is unit elastic, the current price of $5 must be the equilibrium price.
Now, if the government imposes a $1 tax on ticket sales, the new price for tickets will be $6. Due to the unitary price elasticity of demand, the quantity demanded will decrease by 1 million tickets.
Therefore, the new quantity demanded will be 2 million tickets.
As the supply curve is perfectly price elastic, the entire burden of the tax will be borne by consumers.
Tax revenue = tax rate x quantity sold
Since the tax rate is $1 and the new quantity sold is 2 million, tax revenue = $1 x 2 million = $2 million.
Hence, the correct answer is option C, i.e., $2.7 million.

Suppose the Demand Curve for Movie Tickets Has Unitary Price