Question

1. Driven by an increase in the demand for Lysol cans the price of Lysol has increased by 75%. When market price increases the supply increases by 100%. Which of the following is true regarding the price elasticity of supply for cans of Lysol?
   1. The price elasticity of supply is 1.3 and the law of supply holds
   2. The price elasticity of supply is -1.3 and the law of supply holds
   3. The price elasticity of supply is 1.14 and the law of supply holds
   4. The price elasticity of supply is 1.3 and the law of supply does not hold

2. If the price elasticity of supply is very low and the price elasticity of demand is very high in absolute value terms for both, which of the following would be true?
   1. A tax on the market would be borne primarily by producers
   2. A tax on the market would be borne primarily by consumers
   3. A tax on the market would be split evenly by producers and consumers
   4. There is not way of predicting the impact of a tax on the market

Answer 1

a. The price elasticity of supply is 1.3 and the law of supply holds

Price Elasticity of supply = Percentage change in quantity supplied/Percentage change in price

Price Elasticity of supply = 100%/75%

Price Elasticity of supply = 1.3

Positive sign shows as price rises, quantity supplied also rises.

a. A tax on the market would be borne primarily by producers

The party whose curve is inelastic have more tax incidence as that person no matter what price is, does not change its quantity. Since, here supply is inelastic, the tax incidence would primarily be on producers