Suppose the government applies a specific tax to a good where the demand elasticity, epsilon, is...
Suppose the government applies a specific tax to a good where the demand elasticity, epsilon, is negative 0.9, and the supply elasticity, eta, is 0.9. If a specific tax, tau, of $1.75 was placed on the good, to the nearest cent, what is the price increase that consumers would pay? To the nearest cent, what is the price decrease that producers would pay? (round your answer to two decimal places). What is the tax incidence on consumers? (round your answer to two decimal places).
Homework Answers
Burden of tax on consumers = eta/(eta + epsilon) = 0.9/(0.9+0.9)
= 0.9/1.8 = 1/2
So, price increase that consumers would pay = Burden of tax on
consumers*amount of tax = (1/2)*1.75 = 0.88 cents
Burden of tax on producers = epsilon/(eta+epsilon) =
0.9/(0.9+0.9) = 0.9/1.8 = 1/2
So, price decrease that producers would pay = Burden of tax on
producers*amount of tax = (1/2)*1.75 = 0.88 cents
Tax incidence on consumers = 1/2 = 0.50 of the tax
(Note: Absolute value of epsilon is taken.)
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