S E Refer to the figure If t60 p65 pS 35 q10 and q5 calculat

S, :E Refer to the figure. If t-60, p-65, pS 35, q-10 and q\'-5, calculate the tax burden for buyers and sellers, based on that information: What can we imply about the elasticity of demand and supply? 0 A. Supply is elast, and demand is more inelastic O B. Demand and supply are equally elastic C.It cannot be determined; we need to know who is charged with the tax. D Supply is more inelastic than demand

Solution

1. No matter on which side the tax is imposed, both buyers and sellers bear the tax burden. If after tax, sellers\' price = Ps = 35 and tax = t = 60, then after tax buyers pay, Pb = 60+35 = 95 (because, tax = Pb - Ps).

Before tax, equilibrium price P* = 65. It means tax burden on buyers = (95 - 65) = 30 i.e. 50 ? of the tax. And on sellers tax burden = (65 - 35) = 30 i.e. 50? of the tax. It means both sides bear the tax burden equally, which indicates Demand and supply are equally elastic.

Answer- option B

2. Ramen soup is inferior good because it\'s demand decrease (as graduate students tend to buy Gourmet food in Manhattan when they earn more) with increase in income.

Answer- option B

3. If P* = 14, firms make positive profit , because firm in perfect competition maximizes profit by producing at the point where P= MC. Therefore at the profit maximising output level(where P* = MC), Price > ATC. So firms earn supernormal profit.

Answer- option B

If P* = 5, at the profit maximising output level (where P* =MC), price is less than both ATC and AVC. It means the firm is making negative profits (as price < ATC) and it is best for the firm to exit the market as it can\'t cover it\'s AVC.

Answer- option A

If P* = 10, at the profit maximising output level, price < ATC (i.e. firm is making loss) but price > AVC. It means the firm is making loss but should continue production.

Answer- D

If P* = 13, at the profit maximising output level, Price = min. ATC. That means, each firm earns zero economic profit i.e. break evens.

Answer- option C