Question

specific tax to a good where the demand elasticity, e, is 1.4, and the supply elasticity, Suppose the government applies a n, is 1.6 If a specific tax, T, of $1.75 was placed on the good, to the nearest cent, what is the price increase that consumers would pay? S.93 (round your answer to two decimal places) To the nearest cent, what is the price decrease that producers would pay? S.82 (round your answer to two decimal places) What is the tax incidence on consumers? |(round your answer to two decimal places).

I need some help with all three parts. Please and thank you.

Answer 1

We have the relationship between Incidence of taxes and price elasticity of demand and supply such that

(Incidence of tax on seller/Incidence of tax on buyer)=(Price elasticity of Demand/Price Elasticity of Supply)=1.4/1.6=7/8

But Incidence of tax on seller +Incidence of tax on buyer = Total Tax=1.75

(Incidence of tax on seller+Incidence of tax on buyer)/Incidence of tax on buyers=15/8

1.75/Incidence of tax on buyer=15/8

Incidence of tax on buyer=14/15=$0.93 ( Price increase consumer would pay)

Incidence of tax on seller=$1.75-$0.93=$0.82 ( Price decrease seller would pay)

tax Incidence on Consumers =0.93/1.75=53.14%