12. At the equilibrium price of $10, the elasticity of demand and supply are –0.
ID: 1133050 • Letter: 1
Question
12. At the equilibrium price of $10, the elasticity of demand and supply are –0.9 and 1.10. If the government institutes a $1-per-unit tax, what price will sellers receive and consumers pay after the tax? Sellers will receive $9.80, and consumers will pay $10.80. Sellers will receive $10.25, and consumers will pay $11.25. Sellers will receive $9.55, and consumers will pay $10.55. Sellers will receive $9.75, and consumers will pay $10.75. 12. At the equilibrium price of $10, the elasticity of demand and supply are –0.9 and 1.10. If the government institutes a $1-per-unit tax, what price will sellers receive and consumers pay after the tax? Sellers will receive $9.80, and consumers will pay $10.80. Sellers will receive $10.25, and consumers will pay $11.25. Sellers will receive $9.55, and consumers will pay $10.55. Sellers will receive $9.75, and consumers will pay $10.75.Explanation / Answer
The incidence of the tax falls on both consumers and producers of the taxed good. However, the greater burden falls on the side of the market which is less elastic or inelastic. If demand is more inelastic than supply then consumers will bear the burden of the tax and vice-versa in case supply is more inelastic than demand. In this case, demand is more inelastic than supply hence consumers will bear the greater burden of the tax compared to producers. The consumer will pay $11.25 and because sellers are more than unit elastic so they will receive $10.25
the correct option is B
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