5 Suppose that there is a tax of 1 per unit and the elastici

5. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers? ? $0.40 ? $0.67 ? $0.60 ? $0.75

Solution

Since we know burden shared by consumer and producer depends on elasticity of supply and demand.

Consumer share in tax/Producer share in tax=Elasticity of Supply/Elasticity of demand=3/2=1.5

Thus consumer share in tax=1.5 times producer share in tax

Thus consumer pays 0.6 and producer pays 0.4

Thus ans is A