If the pre-tax (inverted) supply and demand curves for a good are given by P =...

If the pre-tax (inverted) supply and demand curves for a good are given by P = 10 + 2Q and P = 100 – Q respectively, then a $30 per unit tax is shared equally between producers and consumers. True or false or uncertain

Solutions

Expert Solution

Elasticity of Demand = dQ/dP×P/Q = -P/Q

Absolute value= P/Q

Elasticity of Supply= dQ/dP×P/Q = 1/2×P/Q

Tax per unit is shared equally between producers and consumers when absolute values of elasticity of demand and supply are the same. Tax burden falls more heavily on the side of the market which is less elastic.

In this problem, absolute value of elasticity of supply is less than elasticity of demand. Thus, $30 would not be shared equally between producers and consumers, producers will bear greater burden of tax having the value of elasticity of supply lower than elasticity of demand.

False

Rahul Sunny answered 1 year ago

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