The price elasticity of demand for a good is 0.5, and the price elasticity of supply is 3. What happens if a $10 per unit tax is placed on buyers of this good?
A) Sellers will have a larger tax incidence than buyers have.
B) Sellers will have a smaller tax incidence than buyers have.
C) The buyers' tax incidence is greater than $10.
D) The buyers' tax incidence is $10.

Question

Quizplus · Accepted Answer

The price elasticity of demand is less elastic (0.5) compared to the price elasticity of supply (3), meaning that buyers are less responsive to price changes than sellers. Therefore, sellers can more easily adjust their quantity supplied in response to the tax, passing a larger portion of the tax burden onto buyers. This results in sellers having a smaller tax incidence than buyers.

The Price Elasticity of Demand for a Good Is 0