Question

Suppose the market for grass seed is expressed as:

Demand: Q D = 100 - 2p

Supply: Q S = 3p

Price elasticity of supply is constant at 1. If the supply curve is
changed to Q = 8p, price elasticity of supply is still constant at
one. Yet with the new supply curve, consumers pay a larger share of
a specific tax. Why?

Answer #1

Considering intital demand and supply function as equilibrium; 100-2P=3P ; 5P=100 ; P*=20 thus equilibrium quantity is 100-40 = 60

thus at intital level the price elasticity of demand = -2X (20/60) = -2/3

in the second level when the supply curve changes to Q=8P the at equilibrium ; 100-2P=8P; 10P=100; P*=10 thus equilibrium quantity is 100-20=80

thus in the seconf stage the price elasticity of demand is = -2 X (10/80)= -1/4

here when the supply curve changes to Q=8P the price elasticity of demand becomes elastic than before though the price elasticity of supply is constant in both of the cases thus tax burden is more on the consumer for the second case.

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