The price elasticity of demand for a manufactured commodity is 0.4, while its price elasti… — JAMB UTME

The price elasticity of demand for a manufactured commodity is $0.4$ , while its price elasticity of supply is $1.6$ . If the government imposes a specific excise tax of $\text{₦}250$ per unit on the commodity, what is the tax burden per unit borne by the consumer in Naira?

Answer: 200 Naira

Answer

The tax burden per unit borne by the consumer is 200 Naira.

Tax incidence depends on the relative price elasticities of demand and supply. The proportion of tax shifted onto consumers is given by

E_s / (E_s + E_d)

. Substituting

E_s = 1.6

and

E_d = 0.4

yields a fraction of

1.6 / 2.0 = 0.8

. Multiplying this by the total tax of

\text{₦}250

gives

\text{₦}200

per unit borne by consumers.

Step-by-Step Solution

Extract the given numerical values from the problem statement.

Price elasticity of demand (

E_d

) =

0.4

, Price elasticity of supply (

E_s

) =

1.6

, Tax per unit (

T

) =

\text{₦}250

These parameters determine the relative distribution of tax burden between buyers and sellers.

Set up the formula for consumer tax burden based on price elasticities.

\text{Consumer Tax Burden} = T \times \left(\frac{E_s}{E_s + E_d}\right)

The burden of a tax falls more heavily on the side of the market that is less elastic.

Substitute the values into the incidence equation and solve.

\text{Consumer Tax Burden} = 250 \times \left(\frac{1.6}{1.6 + 0.4}\right) = 250 \times 0.8 = 200

Naira.

Consumers pay

80\%

of the tax because demand is four times as inelastic as supply.

Key Concept

Tax Incidence and Relative Elasticity of Demand and Supply

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