Sub part (a): Explanation 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: Sub part (b): To determine The burden of tax and the elasticity of demand and supply.

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

Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN: 9781305971509

Author: N. Gregory Mankiw

Publisher: Cengage Learning

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Question

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

Chapter 8, Problem 3PA

Sub part (a):

To determine