Question

7. Effect of a tax on buyers and sellers The following graph shows the daily market for shoes. Suppose the government institutes a tax of $11.60 per pair. This places a wedge between the price buyers pay and the price sellers receive. 50 T 45 40 Supply 35 30 Tax Wedge 20 2 15 10 0 50 100 50 200 250 300 350 400 450 500

The burden of the tax falls more heavily on  the   elastic side of the market. (less/more)

Answer 1

	Q	Price buyer pays($)	price seller receives($)
Bfore tax	250	25	25
After tax	210	35	23.40 (i.e. 35 - 11.60)

	Tax burden($)	Elasticity
Buyers	10 (i.e. 35 - 25)	0.52
Sellers	1.60 (i.e. 25 - 23.40)	2.63

Price elasticity of demand = (210 - 250) / (35 - 25) * (35 + 25) / (250 + 210)

                                      = (-40 / 10) * (60 / 460)

                                      = -2400 / 4600

                                      = -0.52 (the absolute value is 0.52)

Price elasticity of supply = (210 - 250) / (23.40 - 25) * (25 + 23.40) / (250 + 210)

                                      = (-40 /-1.60) * (48.40 / 460)

                                      = 1936 / 736

                                      = 2.63

Answer to blank 1: Less