The following question is about elasticity and taxation. a. Using graphs, explain how elasticity affects who...

The following question is about elasticity and taxation.

a. Using graphs, explain how elasticity affects who bears a larger burden of a tax placed on the buyer. Be detailed in your answer.

b. Given the two points below, calculate the elasticity when going from point A to point B. Why is this not equivalent to the elasticity from point B to point A?

A: (1, 15) B: (3, 5)

Expert Solution

A) The tax burden is shared by buyers and sellers when both demand and supply are relatively inelastic or elastic instead of being perfect elastic or inelastic. Below is the diagram explaining the fact that the inelastic side of the market bears a greater burden of tax. When demand is inelastic, the price rise to buyers due to tax is greater than the price fall to sellers. Similarly, when demand is elastic, the price rise to buyers due to tax is smaller than the price fall to sellers. When demand is perfectly inelastic or supply is perfectly elastic, buyers pay the entire tax. Similarly, when demand is perfectly elastic or supply is perfectly inelastic, sellers pay the entire tax

B) Elasticity decreases as we move down the demand curve and is increased as we move up. Due to this reason the elasticity of demand measured from going from 1 point to the other is not same which is derived as we chose to move from the other point to the given point. This is shown below

Price elasticity from A to B: %change in Q/%change in P = (3 - 1)*100/1 / (5 - 15)*100/15 = -3

Price elasticity from B to A: %change in Q/%change in P = (1 - 3)*100/3 / (15 - 5)*100/5 = -0.33

Rahul Sunny answered 1 year ago

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