Suppose that 75 percent of a cigarette tax is borne by consumers. If the supply elasticity is 1, the demand elasticity is equal to:

Question

Quizplus · Accepted Answer

The tax burden on consumers is determined by the relative elasticities of supply and demand. If 75% of the tax is borne by consumers, it implies that the demand is less elastic than supply. Given that the supply elasticity is 1, the demand elasticity must be 1/3 to result in consumers bearing 75% of the tax burden.

Suppose That 75 Percent of a Cigarette Tax Is Borne