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Consider the market for rubber bands. a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answer. b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Contrast your answer with your answer to part (a).

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
BuyFind

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

Solutions

Chapter
Section
Chapter 8, Problem 3PA
Textbook Problem
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Consider the market for rubber bands.

a. If this market has very elastic supply and very inelastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answer.

b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Contrast your answer with your answer to part (a).

Expert Solution

Sub part (a):

To determine
The burden of tax and the elasticity of demand and supply.

Explanation of Solution

When the tax is imposed on the commodity, the elastic supply curve and the demand curve will react to it and this will lead to the fall in the quantity below the equilibrium quantity by more than the percentage change in the price and will reduce both the consumer surplus and the producer surplus but when the supply curve is very elastic and the demand curve is very inelastic, then the burden of the tax will be large on the one who is very inelastic. Since the one with inelastic curve is the consumers, the burden will be largely on the consumers. This can be illustrated on the graph as follows:

Expert Solution

Sub part (b):

To determine
The burden of tax and the elasticity of demand and supply.

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