Question

In: Economics

Suppose the government imposed an excise tax of $1 per unit on a good. Suppose further...

Suppose the government imposed an excise tax of $1 per unit on a good. Suppose further that the price elasticity of demand for the good is 2 and the price elasticity of supply for it is 3.

1.) What percentage of the tax will be borne by the buyers?

2.) What percentage of the tax will be borne by the sellers?

3.) The price buyers pay for the good after the tax is levied will be _____ than the price they paid prior to the tax.

4.) The price sellers receive for the good after the tax is levied will be ______ than the price they received prior to the tax.

Solutions

Expert Solution

Price elasticity of demand (Ed) = 2

Price elasticity of supply (Es) = 3

(1) The burden of tax borne by the buyers = Es / (ES+Ed)

Burden of tax borne by the buyers = 3 / (3 + 2)

The burden of tax borne by the buyers = 0.6

The burden of tax borne by the buyers = 60%

60% of the tax will be borne by the buyers.

(2) The burden of tax borne by the sellers = Ed / (ES+Ed)

Burden of tax borne by the sellers = 2 / (3 + 2)

The burden of tax borne by the sellers = 0.4

The burden of tax borne by the sellers = 40%

40% of the tax will be borne by the sellers.

(3) The price buyers pay for the good after the tax is levied will be higher than the price they paid prior to the tax.

(4) The price sellers receive for the good after the tax is levied will be lower than the price they received prior to the tax.

Rahul Sunny answered 2 years ago
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