Refer to the figure. If t=60, p*=65 , ps= 35, q*=10 and q’=5, calculate the tax
ID: 1155308 • Letter: R
Question
Refer to the figure. If t=60, p*=65 , ps= 35, q*=10 and q’=5, calculate the tax burden for buyers and sellers, based on that information: What can we imply about the elasticity of demand and supply?A. Demand and supply are equally elastic
B. Supply is more inelastic than demand
C. Supply is elastic and demand is more inelastic
D. It cannot be determined; we need to know who is charged with the tax. Refer to the figure. If t=60, p*=65 , ps= 35, q*=10 and q’=5, calculate the tax burden for buyers and sellers, based on that information: What can we imply about the elasticity of demand and supply?
A. Demand and supply are equally elastic
B. Supply is more inelastic than demand
C. Supply is elastic and demand is more inelastic
D. It cannot be determined; we need to know who is charged with the tax.
Explanation / Answer
Tax burden falls on both sides, no Matter who is charged with the tax. If the after tax seller's price = Ps = 35 and tax= t = 60, then after tax buyers price = Pb = (60+35)= 95 (because tax = t = (Pb - Ps)).
Initially before the tax, at the equilibrium, buyers were paying P* = 65 and sellers were receiving P* = 65. Therefore, tax burden on buyers is (95 - 65) = 30 and on seller is (65 - 35) = 35. That is, buyers carry 50? of the tax burden and sellers carry 50? .
It is known as whoever is more elastic will pay less of the tax. Here both buyers and sellers are bearing the burden equally. Therefore, Demand and supply are equally elastic.
Answer- option A