Question

Do Figure 3- Government policy in the market of jewelry 1. According to the graphic, is the demand for jewelry more elastic or less elastic than supply of jewelry? Why? (1 mark)

2. What government policy would make the demand shift from D₀ to D₁? Clue: you should

specify if it is a tax or a subsidy. If it is a tax, is it imposed on buyers or sellers?

3. According to the graphic, who pays P₁ , who pays P₂ and who bears most the tax

burden (buyers or sellers) in this case? Explain your answer.

Answer 1

We can see that the supply curve is relatively steeper. This implies that the supply is relatively inelastic to demand. Therefore demand is more elastic than supply

Demand curve is shifting to the left. this implies that demand is decreasing and this can be the result of a tax imposed by the government on the purchase of jewellery. It is imposed on buyers because the demand curve is shifting to the left which belongs to buyers

We can see that the price that the buyers are paying as a result of tax increases slightly to P1 and at the same time the price that sellers are receiving as a result of tax decreases greatly to P2. This shows that sellers are bearing a greater tax burden.