Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Consumers will bear most of the tax burden since they are less responsive to price changes.
B
Producers will bear most of the tax burden as they have more flexibility in pricing.
C
The tax burden will be equally shared regardless of elasticity.
D
The tax burden will entirely fall on the government.
Understanding the Answer
Let's break down why this is correct
Answer
When a tax is imposed on a good that has inelastic demand, it means that consumers will continue to buy almost the same amount of that good even if the price increases. This is because inelastic demand indicates that consumers really need or want the product, so they are less sensitive to price changes. As a result, most of the tax burden falls on the consumers, who will pay higher prices for the good. For example, if a tax is placed on a life-saving medication, people will still buy it despite the higher cost because they need it. On the other hand, producers may not bear much of the tax burden since consumers are willing to pay the increased price.
Detailed Explanation
When demand is inelastic, consumers don't change their buying habits much when prices go up. Other options are incorrect because This idea suggests producers can easily change prices; This option assumes everyone shares the tax equally.
Key Concepts
Tax Burden
Elasticity of Demand
Deadweight Loss
Topic
Tax Burden and Deadweight Loss
Difficulty
medium level question
Cognitive Level
understand
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