Suppose a \$6 per-unit tax is imposed on a good. If the supply curve is more elastic than the demand curve, how much of the \$6 tax is paid by the suppliers?

• A. \$2
• B. \$4
• C. \$3
• D. \$6

Answer: (A)

Verified step by step guidance

1. Understand the concept of tax incidence, which refers to how the burden of a tax is divided between buyers and sellers depending on the relative elasticities of demand and supply.
2. Recall that the more inelastic side of the market bears a larger share of the tax burden because they are less responsive to price changes.
3. Since the supply curve is more elastic than the demand curve, suppliers can adjust their quantity more easily than consumers, meaning consumers bear more of the tax burden.
4. Use the formula for tax incidence on suppliers: the fraction of the tax paid by suppliers equals \(\frac{E_d}{E_d + E_s}\), where \(E_d\) is the absolute value of the price elasticity of demand and \(E_s\) is the price elasticity of supply.
5. Multiply this fraction by the total tax amount (\$6) to find the amount of tax paid by suppliers: \(\text{Tax paid by suppliers} = 6 \times \frac{E_d}{E_d + E_s}\).