Suppose the Federal Government would like to levy a new specific per unit tax. T

Question

Suppose the Federal Government would like to levy a new specific per unit tax. They need your help as you are a member of the Council of Economic Advisers in trying to figure out on which good they should assess this new tax. The following scenarios describe the current situation in the two potential markets: Scenario A 1.0 Scenario B Qp 100- 2p Question 1 1 pts Find the incidence of the tax on consumers in Scenario A (Enter as a decimal and round to one decimal place). Canvas will add three zeros at the end of your response.

Explanation / Answer

Incidence of tax on consumers is given by the percentage of tax shared by consumers = supply elasticity / supply elasticity + demand elasticity = 1/(1 + 1.5) = 0.40.

Hence the Incidence of tax on consumers is 0.40 or 40%.

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