Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Consumers bear a smaller portion of the tax burden
B
Producers bear a smaller portion of the tax burden
C
Tax burden is equally shared between consumers and producers
D
Consumers bear a larger portion of the tax burden
Understanding the Answer
Let's break down why this is correct
Answer
When the demand for a product is elastic, it means that consumers are very sensitive to changes in price. If a tax is added to the product, the price will likely increase, and because consumers can easily switch to other products or stop buying it, they will reduce their purchases significantly. This leads to a situation where producers cannot pass on the full tax to consumers without losing sales. As a result, producers end up absorbing a larger portion of the tax burden, while consumers may only see a small increase in price. For example, if a soda company faces a new tax, they might raise prices slightly, but if consumers find cheaper alternatives, the company will have to take on more of the tax to keep their customers.
Detailed Explanation
When demand is elastic, consumers are sensitive to price changes. Other options are incorrect because Some might think producers pay less tax when demand is elastic; It's a common mistake to think the tax is split evenly.
Key Concepts
Tax Incidence
Elasticity of Demand
Consumer Welfare
Topic
Tax Burden and Consumer Behavior
Difficulty
easy level question
Cognitive Level
understand
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