The price elasticity of demand for lychee fruit is 1.3, while the price elasticity of supply is 0.7. The incidence of a $0.25 excise tax placed on lychee fruit will be
A) higher for producers.
B) higher for consumers.
C) equal for producers and consumers.
D) nonexistent for both producers and consumers.

Question

Quizplus · Accepted Answer

The incidence of the tax will be higher for producers because the price elasticity of demand is greater than the price elasticity of supply. This means that consumers will reduce their consumption of lychee fruit by a greater percentage than producers will reduce their supply in response to the tax. As a result, producers will bear a larger share of the tax burden.

The Price Elasticity of Demand for Lychee Fruit Is 1