The Fraction of Tax Passed on to Consumers in Higher Prices

Understanding the Elasticity of Supply and Demand

When Es is the elasticity of supply and Ed is the own price elasticity of demand, we can determine the fraction of the tax passed on to consumers in the form of higher prices. Elasticity of supply is the ratio of the proportionate change in the quantity supplied to the proportionate change in price, while elasticity of demand is the ratio of the proportionate change in the quantity demanded to its price change.

In this scenario, the fraction of the tax passed on to consumers is calculated using the formula:

Es / (Es - Ed)

This formula represents the ratio of elasticity of supply to the difference between elasticity of supply and elasticity of demand. The correct option is A.

Question:

Which formula is used to calculate the fraction of the tax passed on to consumers in the form of higher prices?

Answer:

The correct option is A, which is Es / (Es - Ed).

Explanation:

Elasticity of supply and own price elasticity of demand play a crucial role in determining how taxes are passed on to consumers. The fraction is calculated by dividing elasticity of supply by the difference between elasticity of supply and elasticity of demand. Therefore, the formula for this calculation is Es / (Es - Ed).