Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Consumers will pay a higher price while producers lower their prices to maintain sales.
B
Producers will absorb most of the tax burden, leading to unchanged prices for consumers.
C
The tax burden will be shared between consumers and producers, depending on the relative elasticity of demand and supply.
D
The tax will lead to a significant decrease in consumption, eliminating the need for any price adjustments.
Understanding the Answer
Let's break down why this is correct
Answer
When a government imposes a tax on sugary drinks, the way that tax affects prices and who bears the cost depends on the elasticity of demand and supply. If the demand for sugary drinks is inelastic, consumers will continue to buy them even if prices rise, meaning they will end up paying most of the tax. For example, if a sugary drink costs $1 and a $0. 50 tax is added, people might still buy it because they really want it, so they pay $1. 50.
Detailed Explanation
The tax burden is shared between consumers and producers. Other options are incorrect because This suggests producers lower prices to keep sales, but they can't always do that; This implies producers take on all the tax, which isn't true if demand is elastic.
Key Concepts
Tax Incidence
Elasticity of Demand and Supply
Market Efficiency
Topic
Elasticity and Tax Incidence
Difficulty
easy level question
Cognitive Level
understand
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