The price elasticity of demand is -1.5. The price elasticity of supply is 1.5. 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

The fraction of a specific tax that is borne by producers is given by the formula:```(1 / (1 + (1 / Ed) + (1 / Es)))```where Ed is the price elasticity of demand and Es is the price elasticity of supply.In this case, Ed = -1.5 and Es = 1.5, so the fraction of the tax borne by producers is:```(1 / (1 + (1 / -1.5) + (1 / 1.5))) = 0.5```

The Price Elasticity of Demand Is -1