Suppose a tax on beans of 005 per can is levied on firms As

Suppose a tax on beans of $0.05 per can is levied on firms. As a result of the tax, the equilibrium price increases from $0.20 to $0.22. What fraction of the incidence falls on consumers? On firms? Suppose the supply elasticity is 0.6. What must the demand elasticity be? 5.

Solution

The incidence on consumers equals to 0.4 (=0.02/0.05).

Thus the incidence on firms is 0.6.

If the supply elasticity is 0.6, the demand elasticity must be -0.9