HELP! The elasticity of cereal is greater than 1, while the elasticity of caffeine is lower than that of cereal. For each product, who bears the taxation burden?

Question

anonymous · Answer

So, you're tackling 2 issues here. Taxes increase prices, yes? So then which product is more affected by taxes, based on it's elastic demand? Secondly, the "bearers" of taxation can either be the consumer or the producer. You want to think about which product would a consumer pay more for.

anonymous · Answer

Hmmm....Cereal is more elastic, and therefore a price increase would affect demand for cereal much more than caffeine. For cereal, I wouldn't be willing to pay as much. But for caffeine, I need my morning coffee! But how does taxation come into play?

anonymous · Answer

Good. OK, let's say a cereal box is $10 and a pack of coffee is $10. The gov't implements a 20% hike in taxes! What would happen to demand for each product? And how could producers change the prices to keep the same amount of demand?

anonymous · Answer

Cereal and coffee would rise to $12 each. But demand for cereal would go down more than demand for coffee. So as a seller, I would price cereal lower so that it still sells for $10 including tax - then I'm covering the cost. If I were selling coffee, I would keep it at $10, plus tax - and put the burden of $2 extra on the buyers! I think I get it now! Thanks!

anonymous · Answer

Suppose the supply of both cereal and caffeine is elastic. If demand of cereal is more elastic than caffeine , and a tax is introduced , then more burden would be on buyers of caffeine. I have tried my best to explain you in brief , but it would be really great if |dw:1332499585887:dw|you could organize your question in a better way.