Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
A) $0.60
B) $0.40
C) $0.75
D) $0.67

Question

Quizplus · Accepted Answer

The rule to determine the incidence of the tax is to compare the elasticities of supply and demand. In this case, since the elasticity of supply (3) is greater than the elasticity of demand (2), the sellers bear a greater burden of the tax. The formula to calculate the share of the tax paid by sellers is: (ES / (ES + ED)) * tax = (3 / (3 + 2)) * $1 = $0.60. Therefore, the answer is B ($0.40 is the share paid by buyers).

Suppose That There Is a Tax of $1 Per Unit