If the elasticity of supply is 1, and the elasticity of demand is 3 (in absolute value), then for a tax of $1 buyers will pay:
A) an extra 25 cents and sellers will receive 75 cents less.
B) an extra 75 cents and sellers will receive 25 cents less.
C) an extra 50 cents and sellers will receive 50 cents less.
D) nothing extra since this is the special case where demand is unit elastic.

Question

Quizplus · Accepted Answer

The elasticity of supply is 1, which means that a 1% increase in price will lead to a 1% increase in quantity supplied. The elasticity of demand is 3, which means that a 1% increase in price will lead to a 3% decrease in quantity demanded. Therefore, for a tax of $1, buyers will pay an extra 25 cents (1/3 of $1) and sellers will receive 75 cents less (2/3 of $1).

If the Elasticity of Supply Is 1, and the Elasticity