At the equilibrium price of $10, the elasticity of demand and supply are -0.9 and 1.10. If the government institutes a tax of $1 per unit, sellers will receive _____ and consumers will pay _____.
A) $9.55; $10.55
B) $10.25; $11.25
C) $9.80; $10.80
D) $9.75; $10.75

Question

Quizplus · Accepted Answer

The tax incidence can be divided between consumers and producers based on the elasticity of demand and supply. The formula to determine the share of tax borne by consumers and producers is the tax divided by (1 + elasticity of demand/elasticity of supply). Here, the tax is $1, the elasticity of demand is -0.9, and the elasticity of supply is 1.10. Plugging these values into the formula gives us the share of tax for consumers and producers, leading to sellers receiving $9.55 and consumers paying $10.55.

At the Equilibrium Price of $10, the Elasticity of Demand