The luxury boat industry is currently producing 100,000 boats which sell for $50,000 each. If a 20% excise tax on boats increases the price of boats to $60,000 each and the price elasticity of demand for boats is -2, how much revenue will the boat tax generate?

The formula given below is used to compute the price elasticity of demand.

Where,

• = percentage change in the quantity demanded

• = percentage change in the price of the good or service.

We need to rearrange the formula to solve for . You can find the new formula below.

We can proceed to compute the change in quantity demanded.

Now, we know the percentage change in the quantity demanded. Then, we have to adjust this quantity by multiplying the original quantity demanded by 60% (100%-40%).

Then, we have to multiply this new quantity demanded by the tax imposed ($60,000 - $50,000 = $10,000).

Therefore, the tax revenue is $600,000,000.