Calculate the percentage of the tax borne by the demander and supplier in each o

Question

Calculate the percentage of the tax borne by the demander and supplier in each of the following cases:

A. ED= 2, ES= 3

B. ED= 1.5, ES= 0.5

C. ED= 0.3, ES= 1.2

D. ED= 0.5, ES= 1.4

2. Summarize your findings regarding relative elasticity and tax burden.

a. Producers usually bear a greater portion of the tax burden because the government generally levies more taxes on producers.

b. Whichever group (producers or consumers) has the higher elasticity bears the greater portion of the tax burden.

c. Consumers bear a greater portion of the tax burden because consumers choose to buy the good.

d. Whichever group (producers or consumers) has the lower elasticity bears the greater portion of the tax burden.

Explanation / Answer

1. Fraction of tax borne by the demanded = ES/(ED+ES)

Similarly, for supplier = ED/(ED+ES)

a. ED = 2 and ES = 3.

borne by demander = 3/(2+3) = 0.60 or 60%.

borne by supplier = 2/(3+2) = 0.4 or 40%.

b. ED = 1.5 and ES = 0.5

borne by demander = 0.5/(0.5+1.5) = 0.25 or 25%

borne by supplier = 1.5/(0.5+1.5) = 0.75 or 75%.

c. ED = 0.3 and ES = 1.2

borne by demander = 1.2/(1.2+0.3) = 0.80 or 80%

borne by supplier = 0.3/(1.2+0.3) = 0.2 or 20%

d. ED = 0.5 and ES = 1.4

borne by demander = 1.4/(1.4+0.5) = 0.736 or 73.6%

borne by supplier = 0.5/(1.4+0.5) = 0.263 or 26.3%

2. Option D is correct.

This is so because, lower the elasticity, lower would be the changes in demand/supply with the changes in price and the group with lower elasticity would bear a greater burden.

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