Question

Suppose that the government imposes a $10 tax on sellers of Humbugs. The pre-tax price of Humbugs was $50. If, at the original equilibrium price, the elasticity of demand was 2 and the elasticity of supply was 15, which of the following is true? The equilibrium quantity of Humbugs will not change. The full amount of the tax will be paid by buyers. Sellers will pay relatively more of the tax than buyers. Buyers will pay relatively more of the tax than sellers. The full amount of the tax will be paid by the sellers Now suppose that the elasticity of demand was 0, and the elasticity of supply was 15. Which of the following is true? Instructions: You may select more than one answer Click the box with a check mark for correct answers and click to empty the box for the wrong answers Sellers will pay all of the tax ✓ Buyers will pay all of the tax The price of Humbugs will rise to $60. The price of Humbugs will rise by less than $10, The quantity of Humbugs demanded will not change.

Answer 1

If the demand is relatively inelastic than the supply, then consumers bear the higher burden of the tax. If the supply is relatively inelastic than the demand, then producers bear the higher burden of the tax. Further, if the absolute value of elasticity of demand or supply is higher, then it is said to be more elastic. Thus, if the elasticity of demand is -2 and the elasticity of supply is 1.5, then the absolute value of elasticity of demand is higher, and thus, it is more elastic. In other words, supply is relatively inelastic since the absolute value of elasticity of supply is lower. Thus, producers will bear a higher burden of tax. Therefore, the correct answer is option C: Sellers will pay relatively more of the tax than buyers A zero elasticity of demand means that there is no change in the quantity demanded, no matter what the prices are. Thus, quantity will remain the same, no matter what. This will give a vertical demand curve, which is perfectly inelastic. Therefore, buyers will pay all of the tax. Since equilibrium price is $50, and a tax of $10 is imposed, the price of humbugs will increase to $60. Also, since the demand is perfectly inelastic, the quantity of humbugs demanded will not change. Therefore, the correct answers are: Option B: Buyers will pay all of the tax Option C: The price of Humbugs will rise to $60 Option E: The quantity of humbugs demanded will not change.