Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is:
A) 0
B) 0.25
C) 0.5
D) 0.75
E) 1

Question

Quizplus · Accepted Answer

The fraction of a specific tax passed through to consumers can be calculated using the formula: $\frac{E_s}{E_s + |E_d|}$, where $E_s$ is the price elasticity of supply and $E_d$ is the price elasticity of demand. Plugging in the given values, $E_s = 1.5$ and $E_d = -0.5$, we get $\frac{1.5}{1.5 + 0.5} = \frac{1.5}{2} = 0.75$. This means 75% of the tax is passed through to consumers.

Consider a Good Whose Own Price Elasticity of Demand Is