Every autumn brings an increase in the demand for pumpkin spice lattes (PSL). This fall, the demand for PSLs in a mid-sized midwestern town is given by QD = 10 – 0.5P, where P is the price of a PSL in dollars and Q is thousands of PSLs per day. The corresponding supply is given by QS = -5 + 2P. The equilibrium price of a PSL is $6; the equilibrium quantity is 7,000.

a. Calculate the price elasticity of demand and the price elasticity of supply at the equilibrium price and quantity.

b. Eager to capitalize on the addictive nature of the PSL, the City Council decides to impose a $1 tax on pumpkin spice lattes. “We can use the proceeds to fund an espresso machine for City Hall!” they rave. Using your answer to (a), calculate the share of the tax borne by consumers of pumpkin spice lattes, and the share of the tax borne by sellers.

c. Determine the expected price buyers will have to pay after the tax is imposed. Then calculate the expected price sellers will receive after the tax.