Essay
Suppose the demand for good X can be represented by the following equation: Xd = 22 - (1/4)PX. Furthermore, suppose that the demand for good Y can be represented by Yd = 50 - PY.
(A)Find the elasticity of demand for both good X and good Y when the prices of both are $10.
(B)Suppose that an ad valorem tax is placed on both goods. Good Y is taxed at a rate of 5%. To ensure that the inverse elasticity rule holds, what must be the rate at which good X is taxed?
Reminder: Elasticity at a given price is found using the formula s = -(1/S)(P/X), where S is the slope of the demand curve, X is the quantity demanded, and P is the price.
Correct Answer:
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(A)sx = (1/4)(10/19.5)= 0.128....View Answer
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