Suppose the market for grass seed is expressed as Demand: QD = ...

[anshika]

Suppose the market for grass seed is expressed as Demand: QD = 100 - 2p Supply: QS = 3p Price elasticity of supply is constant at 1. If the supply curve is changed to Q = 8p, price elasticity of supply is still constant at 1. Yet, with the new supply curve, consumers pay a larger share of a specific tax. Why?
 
  What will be an ideal response?

Question 2

Suppose the market for grass seed can be expressed as Demand: QD = 100 - 2p Supply: QS = 3p If government imposes a 10 ad valorem tax to be collected from sellers, what is the price consumers will pay? How much tax revenue is collected?
 
  What will be an ideal response?

[nickk12214]

Answer to Question 1

Even though the elasticity of supply has not changed, the new supply curve intersects the old demand curve at a lower price where demand is relatively less elastic than at the higher price. Since the incidence of a specific tax on consumers is n/(n - e), where n is the price elasticity of supply and e is the price elasticity of demand, therefore when e increases (less elastic demand), the consumers' tax incidence is higher.

Answer to Question 2

First rearrange the supply curve, p = Q/3. Sellers must receive this price plus 10 more to pay the tax. Thus, p + tax = (1.1Q)/3. Substituting into the demand curve yields Q = 100 - (2.2/3)Q or (5.2/3)Q = 100 or Q = 57.69. Solving for price plus tax yields p + tax = (100 - 57.69)/2 = 21.15, i.e. the price that consumers will pay is 21.15. Note price does not rise by 10 of the old price of 20. 21.15 represents the new price plus the 10 tax. Solving for the price yields p = 21.15/1.1 = 19.23. Tax revenue equals (21.15 - 19.23 )  57.69 = 110.76.

[anshika]

Thank you

[nickk12214]

No problemo