Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is:

A) 0
B) 0.25
C) 0.5
D) 0.75
E) 1

Question

Lehel Flothmann · Accepted Answer

Final Answer : D, Explanation :   The fraction of a specific tax passed through to consumers can be calculated using the formula:   E s E s + ∣ E d ∣ \frac{E_s}{E_s + |E_d|} E s ​ + ∣ E d ​ ∣ E s ​ ​  , where   E s E_s E s ​   is the price elasticity of supply and   E d E_d E d ​   is the price elasticity of demand. Plugging in the given values,   E s = 1.5 E_s = 1.5 E s ​ = 1.5   and   E d = − 0.5 E_d = -0.5 E d ​ = − 0.5  , we get   1.5 1.5 + 0.5 = 1.5 2 = 0.75 \frac{1.5}{1.5 + 0.5} = \frac{1.5}{2} = 0.75 1.5 + 0.5 1.5 ​ = 2 1.5 ​ = 0.75  . This means 75% of the tax is passed through to consumers.

Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is:

A) 0
B) 0.25
C) 0.5
D) 0.75
E) 1

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Learning Objectives

Related questions

Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is:A) 0B) 0.25C) 0.5D) 0.75E) 1

Definitions

Learning Objectives

Learning Objectives

Related questions

Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is:

A) 0
B) 0.25
C) 0.5
D) 0.75
E) 1