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 Q D Question 4 2 pts The President would like a report on your previous findings. Specifically, he would like you to provide an explanation for why the burden of the tax is greater in the scenario you choose in the previous question HTML Editor Paragraph

Explanation / Answer

Scenario 1)

E = -1.5

Scenario 2)

3P = 100 - 2P

5P = 100

P = 100/5

=20

Q = 3(20)

= 60

Ed = dq/dP * P/Q

= - 2 *20/60

= 40/60

= - 0.66

Demand more elastic in scenario 1, thus tax should not be levied on first market.

It should be imposed in market 2 only because demand is inelastic here.

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