Question

4. Problem 10.9: The current equilibrium price in a competitive market is $100. The price elasticity of demand is - 4 , and the price elasticity of supply is + 2 . If a tax of $3 per unit is imposed, how much would you expect the equilibrium price paid by consumers to change? How much would you expect the equilibrium price received by producers to change?

Answer 1

using the formual

=

we obtain ,

and

Both of these ratios tell us that if the consumer price goes up by one unit, the producer price goes down by two units. In total we have three units. Dividing the tax, $3, by 3 units means each unit is worth $1.

So, the price received by producers decreased by $2 and the price consumers have to pay increased by $1.