Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The burden of a tax falls more heavily on consumers when demand is inelastic.
B
A tax on a good with elastic demand leads to a significant decrease in quantity demanded.
C
The tax burden is shared equally between sellers and buyers regardless of demand elasticity.
D
Sellers of goods with inelastic demand will likely experience a smaller drop in quantity sold due to taxation.
E
Consumers are less responsive to price changes when demand is elastic.
Understanding the Answer
Let's break down why this is correct
Answer
The elasticity of demand measures how much the quantity demanded of a good changes when its price changes. When demand is elastic, consumers are more sensitive to price changes, meaning that if a tax is added and prices rise, they might buy much less of that good. On the other hand, if demand is inelastic, consumers are less sensitive to price changes, so they will continue buying the good even if the price increases due to a tax. For example, if a tax is placed on a necessary medicine, demand is likely inelastic because people need it regardless of the price, resulting in the tax burden falling more on consumers. Thus, the incidence of taxation depends on whether demand is elastic or inelastic, affecting who ultimately bears the cost of the tax.
Detailed Explanation
Other options are incorrect because Some might think that if demand is inelastic, consumers will bear the tax burden; It is a common belief that a tax on goods with elastic demand will always cause a big drop in sales.
Key Concepts
Elasticity of Demand
Taxation Impact
Consumer Behavior
Topic
Elasticity of Demand and Taxation
Difficulty
medium level question
Cognitive Level
understand
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