The supply and demand for soda in a market is represented by Q D = 12 – 8 P Q S

Question

The supply and demand for soda in a market is represented by

QD = 12 – 8P

QS = 50P – 60

Where Q is in millions of bottles per year and P  is dollars per bottle,

The current equilibrium price is $1.24, and 2.07 million bottles are sold per year.

Calculate the price elasticity of demand and price elasticity of supply at the current equilibrium. Using the formula given in class, find what share of a tax would be borne by consumers if one were to be implemented in this market. (keep in decimal format 0.## rounded to HUNDREDTH)

What would be the share borne by producers?

Explanation / Answer

Point elasticity of demand = slope x price / quantity = -8*1.24/2.07 = -4.79.

Point elasticity of supply = slope x price / quantity = 50*1.24/2.07 = 29.95

Share of tax borne by consumers = price elasticity of supply/(price elasticity of demand + price elasicity

of supply) = 29.95/(29.95 + 4.79) = 86.2%. = 0.862

Share of tax borne by producer = price elasticity of demand/(price elasticity of demand + price elasicity

of supply) = 4.79/(29.95 + 4.79) = 13.8%. = 0.138

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.