Question

Suppose the equilibrium price of textbooks is $40 a textbook. At that price, quantity of textbooks demanded and supplied is 20,000. If a $5 tax per textbook paid by producers increases the price paid by consumers to $42 a textbook and reduces equilibrium quantity sold to 18,000, then:

A. elasticity of demand is 0.89. Consumers pay a larger portion of the tax.
B. elasticity of demand is 0.46. Consumers pay a smaller portion of the tax.
C. elasticity of demand is 2.16. Consumers pay a larger portion of the tax.
D. elasticity of demand is 2.16. Consumers pay a smaller portion of the tax

Answer 1

Answer:

elasticity of demand is 2.16. Consumers pay a smaller portion of the tax

Explanation:

Elasticity of demand measures the responsiveness of quantity demanded to changes in price.

Elasticity of demand = percentage change in quantity demanded / percentage change in price

(2/19)(2/41) = 2.16

When the coefficient of elasticity is greater than 1, demand is elastic.

Elastic demand means that a small change in price leads to a greater change in quantity demanded.

Because demand is elastic, more of the burden of the tax falls on producers and consumers pay a small portion of the tax.

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