Question

The price elasticity of demand is -1.25, and the price elasticity of supply is 1.25. What is the consumer's burden from a 26 cent tax?

a. 13 cents

b. 26 cents

c. Insufficient information to know

Answer 1

It is observed that the magnitude of price elasticity of supply and demand is equal i.e. 1.25 which means the incidence of tax will also be equal on both consumer and producer.
Hence, the consumer burden is 13 cents.

.'. The answer is (a) 13 cents

(b) 26 cents is not the correct answer because it means that the entire burden of tax of 26 cents falls on the consumer which is not true beacause equal magnitude of elasticity implies the burden is shared equally by both consumer and producer

(c) insufficient information to know is not a correct answer because already complete information is provided in the form of elasticity to conclude that burden of tax is equally shared.