Question

10.3. Gadgets are produced and sold in a competitive market. When there is no tax, the equilibrium price is $20 per gadget. The own-price elasticity of demand for gadgets is 0.5.If an excise tax of $4 leads to an increase in the price of gadgets to $24, what must be true about the own-price elasticity of supply for gadgets

Answer 1

isΔ PdΔ Ps=EQs, PEQd,PAs given in the question, 40=EQs, P−0.5This perfectly elastic supply shows the burden of tax is imposed completely on the consumer, indicating the elasticity of supply is infinite.