Question

Question 6 (1 point) Suppose that in a perfectly competitive market, demand and supply are given by QD = 100 – bP Q = P – 20 where b=1.0. The government imposes a per-unit tax of $1 on the good. How large is the consumer share of the tax burden? If necessary, round to 2 decimals. Your Answer: Your Answer Question 7 (1 point) In the previous Question 6, you could have found the consumer share of the tax much faster using only the slopes of demand and supply. O True False

Answer 1

6). The slope of demand function and supply function is same at 1. This implies that both are unitary elastic and so they share the tax burden equally. For a tax of $1, consumer shares a burden of $0.5 of tax. Hence the answer is $0.50

7) True. This is because tax incidence depends on demand and supply elasticity and this depends on slope of demand and supply curves.