Question

After a tax is imposed on the market for bottled water, the price buyers pay is $2.50 per bottle and the price sellers receive is $1.75. If the equilibrium price was $2.00 before the tax was imposed on the market, what can you conclude about the relative price elasticities of demand and supply? Demand is more elastic than supply. Supply is more elastic than demand. The price elasticities of demand and supply are equal. We need to know whether the tax is collected from the buyers or sellers to conclude anything about the relative elasticities of demand and supply.

Answer 1

Answer:

It can be concluded about the elasticity of demand and supply prices that supply is more elastic than demand

Explanation:

Price in the market is determined by demand and supply, it is measured in terms of the  variables quantity and  variables price. When a tax is placed on a product, it generate a change  in the market equilibrium, this is because buyers pay more and sellers receive less.

Therefore, a tax causes the supply curve to move up and the demand curve to move down.

To know the distribution of tax, the incidence is measured through the elasticity of the supply and demand curve, which measures the sensitivity of the quantity, demanded  of products before a price change.

If the supply curve is more elastic than the demand curve, this is because when the price  paid by consumers increase more than the price the sellers receive decreases, the impact of the tax is stronger for consumers.

The total tax on a unit of bottled water =

$2.50 - $2 = $0.50  

$2 - $1.75 = $0.25

$0.15 + $0.25= $0.75

Answer 2

Answer:

Supply is more elastic than demand. 

Explanation:

The total tax on a unit of bottled water = ( $2.50 - $2 = $0.50 ) + ($2 - $1.75 = $0.25) = $0.75

It can be seen that consumers bear the greater burden of tax when compared to producers.

Elasticity of demand or supply measures the sensitivity of quantity demanded or supplied to changes in price.

It is believed that whoever bears the more burden of tax has a less elastic demand or supply and the party that bears the less burden of tax has a more elastic demand or supply.

The more elastic demand or supply is, the greater its sensitivity is to changes in price. If there's a small change in price, there's a greater change in quantity demanded or supply changes.

The less elastic demand or supply is, the less sensitive quantity demanded or supplied is to changes in price.

So the party with the less elastic demand or supply would bear more burden of tax. In this question, it is consumers.

While the party with a more elastic demand or supply would bear less burden of tax. In this question, it is the producers.

I hope my answer helps you