How would you answer the following and something like it? How do you start to think about it? Specifically for this question, have ideas about price elasticity and target customer segments but would love your ideas. Thank you!
“There are three products: tomatoes, luxury cars, T-shirts. What value-added tax is applied to each product type?”
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I don't think this is a brainteaser, but rather a question to check if one has any idea on how the world works. In this case, how the VAT rates work (I am assuming you are in a country that applies VAT). I would expect a candidate, particularly one with a business background, to know the answer to this question.
On the other hand, I must say I would never this to a candidate, at least not on purpose (i.e. serendipity happens during a case interview).
Assuming this is indeed a brainteaser (which I find odd), you would have to first consider the interest of who imposes the tax, i.e., the government.
They have several objectives when imposing a tax, but ultimately it is a matter of balancing expected tax revenues and social impact.
For potential tax revenues, you have to look at elasticity. This is tricky here. Luxury goods tend to have negative elasticities (i.e., up to a point, a higher price actually results in higher sales), normal goods have normal elasticities, and basic goods sometimes also have negative elasticities (i.e., if you increase prices you consume more of them, because you have less money and instead of cutting on them you cut on higher quality products).
So if you want to maximize tax revenues, you tax high the luxury cars (luxury) and the tomatoes (basic), and not a lot the t-shirts (normal goods). This sounds crazy right? It is, as this is socially unnaceptable, but if you think about it, it is the reason why fuel taxes are so high in Europe. A lot of people really need that fuel…
Of course, if you care at all about your population (and don't want to face much deserved social turmoil), you should actually tax low the tomatoes (or no tax at all), medium the t-shirts and high the luxury vehicles. So this is the answer.
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Hi there,
I agree with Pedro that this doesn’t seem a brainteaser.
I would structure as follows:
Hope this helps,
Francesco
Hi there,
I must confess, I'm a bit confused by the answers here. I feel the answers have overcomplicated this and assume it's from a case/prompt. Is that the case?
Because, if you're interviewing with an economics consultancy or think-tank, this would just have the literal answers that tomatoes would have full value-added tax on their price, luxury cars would need to subtract the value of the car from the purchase price of all of the individual parts, and T-shirts would have to subtract out the price of the shirt material (wool, etc.) from the price of the shirt itself.
This feels like just a math/economics problem, not a full on case prompt.
Amazing and EXACTLY how I answered it! Thank you!
Congratulations then!