Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The price consumers pay will increase significantly while producers receive almost the same price.
B
The price consumers pay will remain unchanged and producers will bear the full tax burden.
C
Both consumers and producers will share the tax burden equally.
D
Only producers will experience an increase in prices, while consumers will pay less.
Understanding the Answer
Let's break down why this is correct
Answer
In a market with inelastic demand, consumers will continue to buy almost the same amount of a product even if the price goes up. When a tax is imposed on this product, producers can easily adjust their supply to meet demand without changing their prices much, since supply is perfectly elastic. As a result, most of the tax burden falls on consumers, leading to a higher price for them. For example, if a tax of $1 is added to a product that costs $5, consumers might end up paying $5. 50, while producers still receive close to $5.
Detailed Explanation
When demand is inelastic, consumers will keep buying even if prices go up. Other options are incorrect because This suggests that prices stay the same for consumers; This implies that both sides share the tax equally.
Key Concepts
price elasticity of demand
inelastic demand
perfectly elastic supply
Topic
Elasticity and Tax Incidence
Difficulty
hard level question
Cognitive Level
understand
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