Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Consumers bear the entire tax burden
B
Producers bear the entire tax burden
C
The burden is shared equally between consumers and producers
D
The tax burden is irrelevant in this scenario
Understanding the Answer
Let's break down why this is correct
Answer
In a market with perfectly inelastic demand, consumers will bear the entire tax burden because they will buy the same amount of the product regardless of its price. This means that even if the price increases due to the tax, consumers will still need to purchase the same quantity since they cannot do without the good. For example, if a tax is added to life-saving medicine, people will continue to buy it even if the price goes up, so they end up paying the full amount of the tax. Producers, on the other hand, do not lose any sales from the tax because the demand does not change; they can pass the entire tax cost onto consumers. Therefore, in such a market, the tax does not affect the quantity sold but instead increases the price consumers pay.
Detailed Explanation
When demand is perfectly inelastic, consumers will buy the same amount no matter the price. Other options are incorrect because This option suggests that producers pay all the tax; This choice implies that both sides share the tax equally.
Key Concepts
Elasticity of demand
Tax incidence
Market efficiency
Topic
Elasticity and Tax Incidence
Difficulty
medium level question
Cognitive Level
understand
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