Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Consumers will bear a larger share of the tax burden compared to producers.
B
Producers will likely reduce the price to maintain sales, thus absorbing most of the tax burden.
C
The tax will have minimal impact on consumer behavior, leading to unchanged consumption levels.
D
The burden will be evenly shared between consumers and producers due to the elastic nature of the demand.
Understanding the Answer
Let's break down why this is correct
Answer
When a new tax is imposed on a luxury good that has elastic demand, it means that consumers are sensitive to changes in price. If the price of the luxury good goes up because of the tax, many consumers might decide not to buy it or look for cheaper alternatives. This means that the burden of the tax will mostly fall on producers, as they may need to lower their prices to keep customers. For example, if a high-end handbag is taxed and its price rises significantly, buyers might choose to buy a less expensive handbag instead, leading to reduced sales for the producer. Therefore, the tax can hurt producers more than consumers in this situation.
Detailed Explanation
When demand is elastic, consumers are sensitive to price changes. Other options are incorrect because This suggests consumers will pay most of the tax; This implies the tax won't change how much people buy.
Key Concepts
Tax incidence
Elasticity of demand
Market behavior
Topic
Tax Burden and Consumer Behavior
Difficulty
hard level question
Cognitive Level
understand
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