Question

Consider a good whose own price elasticity of demand is -1.0 and price elasticity of supply is 0.5. the fraction of a specific tax that is borne by producers is

Answer 1

0.75

Step-by-step explanation:

Specific taxes are indirect taxes where a fixed sum is paid per unit sold.

To calculate the specific tax in this case, we solve as follows;

We calculate the effect of the price elasticity of both the demand and supply

Specific Tax = (0.5-1.0) * (-1.0-0.5) --------- Simplify Expressions in Each Brackets

Specific Tax = (-0.5) * (-1.5) --------------- Open all brackets

Specific Tax= -0.5 * -1.5

Specific Tax = 0.75

So, the tax borne by the producer on the good is 0.75