Asked by Lavkush Tamrakar on May 27, 2024
Verified
Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of supply of X is unitary (coefficient = 1) . If the incidence of the tax is such that the consumers of X pay $1.85 of the tax and the producers pay $0.15, we can conclude that the
A) supply of X is inelastic.
B) demand for X is unitary elastic.
C) demand for X is elastic.
D) demand for X is inelastic.
Price Elasticity of Supply
A measure of how much the quantity supplied of a good responds to a change in the price of that good, quantitatively defined as the percentage change in quantity supplied divided by the percentage change in price.
Incidence
The allocation or impact of a tax or policy on the economic activities or welfare of different groups in society.
Elastic
Describes a situation in which the quantity demanded or supplied of a good or service is highly responsive to changes in price.
- Learn about the significance of demand and supply price elasticity in ascertaining the distribution of tax obligations.
Verified Answer
JN
Jaxon NaramoreMay 30, 2024
Final Answer :
D
Explanation :
The fact that consumers bear the majority of the tax burden ($1.85 out of $2) indicates that the demand for product X is relatively inelastic. When demand is inelastic, consumers are less sensitive to price changes, and thus, are more likely to absorb a larger portion of the tax.
Learning Objectives
- Learn about the significance of demand and supply price elasticity in ascertaining the distribution of tax obligations.