Suppose the demand curve for a good is downward sloping and the supply curve is upward sloping.At the market equilibrium,if demand is more elastic than supply in absolute value,a $1 specific tax will
A) raise the price to consumers by 50 cents.
B) raise the price to consumers by less than 50 cents.
C) raise the price to consumers by more than 50 cents.
D) raise the price to consumers by $1.

Question

Quizplus · Accepted Answer

When demand is more elastic than supply, the burden of tax will fall more on consumers than on producers. So, the price increase to consumers will be less than the amount of tax, which is $1 in this case. Research has shown that the price increase to consumers will be equal to the amount of the tax multiplied by the ratio of the elasticity of demand to the sum of the elasticity of demand and the elasticity of supply. In this case, since demand is more elastic than supply, the elasticity of demand (in absolute value) is greater than the elasticity of supply, so the price increase to consumers will be less than 50 cents ($0.50).

Suppose the Demand Curve for a Good Is Downward Sloping