Consider a good whose own price elasticity of demand is -1.5 and price elasticity of supply is 0.5. The fraction of a specific tax that is borne by producers is:
A) 0
B) 0.25
C) 0.5
D) 0.75
E) 1

Question

Quizplus · Accepted Answer

When the price elasticity of demand is greater in absolute value than the price elasticity of supply (-1.5 > 0.5), the burden of the tax falls mainly on producers. The percentage of the tax burden borne by producers is given by (1 - (elasticity of supply / absolute value of the sum of the elasticity of supply and demand)) = (1 - (0.5 / (0.5 + 1.5))) = 0.75 or 75%. Therefore, the correct answer is (D) 0.75.

Consider a Good Whose Own Price Elasticity of Demand Is