Question

7. Effect of a tax on buyers and sellers 

The following graph shows the daily market for jeans. Suppose the government institutes a tax of $40.60 per pair. This places a wedge between the price buyers pay and the price sellers receive.

Answer 1

Elasticity;

Buyers; P1 = 100, P2 = 105.6, Q1 = 500, Q2 = 420

Ed = (P1 + P2)/(Q1 + Q2) x (Q2 - Q1)/(P2 - P1) = 205.6/920 x - 80/5.6 = 0.22 x - 14.28 = - 3.14

Seller: P1 = 100, P2 = 65, Q1 = 500, Q2 = 420

Ed = 165/920 x - 80/-35 = 0.18 x 2.28 = 0.41

Less elastic side of the market.

Answer 2

almost correct 

After-tax - 430 

Buyer elasticity - 2.76

Sellers elasticity - 0.35