Question

Suppose that there is a tax of $5 per unit, and the demand curve is more elastic than the supply curve. Which of the following statements could be true?

A. buyers pay $3 of the tax
B. buyers pay $1 of the tax
C. sellers pay $1 of the tax
D. sellers pay all of the tax

Answer 1

If demand is more elastic than supply, buyers pay $3 of the tax and sellers pay $2.

Step-by-step explanation:

If demand is more elastic than supply, consumers bear most of the tax burden, and if supply is more elastic than demand, sellers bear most of the tax burden.

In this scenario, the demand curve is more elastic than the supply curve.

This means that buyers are more sensitive to price changes and will react strongly to the tax.

Therefore, buyers pay $3 of the tax, and sellers pay the remaining $2.