Question
Asked Nov 4, 2019
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1. Draw how the burden of the tax is distributed under the following scenarios:
a) Inelastic demand and elastic supply
b) Elastic demand and inelastic supply
c) Relative elasticities of demand and supply are similar
In each diagram, clearly label: equilibrium price before the tax, price paid by buyers after the
tax, price received by sellers after the tax, portion of tax burden on consumers, and portion of tax
burden on producers.
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1. Draw how the burden of the tax is distributed under the following scenarios: a) Inelastic demand and elastic supply b) Elastic demand and inelastic supply c) Relative elasticities of demand and supply are similar In each diagram, clearly label: equilibrium price before the tax, price paid by buyers after the tax, price received by sellers after the tax, portion of tax burden on consumers, and portion of tax burden on producers.

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Expert Answer

Step 1

a) Inelastic demand and elastic supply:

In this case, the initial equilibrium is at e at price P and quantity Q. With an increase in tax supply curve shifts upwards, now the new equilibrium is at e1 with the price P1 paid by the buyers and sellers receive price T. The tax burden borne by consumers is represented by the area P1PKe1 and the tax burden borne by the producers is represented by the area PTSK. Obviously since the demand is inelastic consumer bears most of the burden of the tax.

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Price S1 el P1 P e 01 Quantity

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Step 2

b) Elastic demand and Inelastic supply:

In this case, the initial equilibrium is at e with price P and quantity Q. With an increase in tax supply curve shifts upwards, now the new equilibrium is at e1 with the price P1 paid by the buyers and sellers receive p...

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Price S1 el P1 P K D Q Q1 Quantity

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Supply and Demand

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