Answer

Solution

1. 1

   With elasticities $\varepsilon_D, \varepsilon_S$ (positive numbers), the share of

2. 2

   the tax borne by buyers is

3. 3
   $$\frac{\varepsilon_S}{\varepsilon_S + \varepsilon_D}.$$
4. 4

   We are told this share equals $0.8$.

5. 5

   \begin{itemize}

6. 6
   • Perfectly elastic demand ($\varepsilon_D = \infty$) gives buyer share $0$. Rules out (A).
7. 7
   • Perfectly inelastic demand ($\varepsilon_D = 0$) gives buyer share $1$. Rules out (B).
8. 8
   • Perfectly elastic supply ($\varepsilon_S = \infty$) gives buyer share $1$. Rules out (D).
9. 9

   \end{itemize}

10. 10

    A buyer share strictly between $0$ and $1$ requires both elasticities to be

11. 11

    positive and finite.

Answer structure / marking notes

Content note