Question

The elasticity of demand for a product is -2.0, and the elasticity of supply is 3.0. How much will the price of the good change with a per-unit tax of $2 on consumers? Who bears the larger burden of the tax, consumers or producers. Explain your answer

Include workout please

Answer 1

The elasticity of demand for a product (Ed) is -2.0, and the elasticity of supply (Es) is 3.0

Burden of tax on consumers = Es/(Es+Ed).
(Absolute value of Ed is taken which is 2.0)
So, Burden of tax on consumers = 3/(3+2) = 3/5 = 0.6

And, burden of tax on producers = Ed/(Es+Ed).
(Absolute value of Ed is taken which is 2.0)
So, burden of tax on producers = 2/(3+2) = 2/5 = 0.4

Thus, tax paid by consumers = Burden of tax on consumers*tax amount = (0.6)*(2) = 1.2

So, price of the good will increase by $1.2 after tax.

And larger burden falls on consumers as they pay 0.6 or 60% of the tax and producers pay 40%