Question
Suppose that we are in the butter market and the government implements an excise tax on butter. The price elasticity of demand for butter equals 2 (ED=2) and the price elasticity of supply for butter equals 2 (Es=2).
What is the portion of the tax that consumers will be burdened with? Is this realistic given the market we are in?
A Consumers will be burdened with 2/3 of the tax; this is not realistic given that butter is a small percentage of individual’s budgets and therefore the price elasticity of demand should be elastic or greater than 1, so we would expect consumers to bear a greater portion of the tax relative to producers.
B Consumers will be burdened with 2/3 of the tax; this is realistic given that butter is a small percentage of individual’s budgets and therefore the price elasticity of demand should be inelastic or less than 1, so we would expect consumers to bear a greater portion of the tax relative to producers.
C Consumers will be burdened with 1/2 of the tax; this is realistic given that butter is a small percentage of individual’s budgets and therefore the price elasticity of demand should be inelastic or less than 1, so we would expect consumers to bear a smaller portion of the tax relative to producers.
D Consumers will be burdened with 1/2 of the tax; this is not realistic given that butter is a small percentage of individual’s budgets and therefore the price elasticity of demand should be inelastic or less than 1, so we would expect consumers to bear a greater portion of the tax relative to producers.
This question is taken from Econ 101 – Microeconomics » Winter 2022 » Test 2
