A tax imposed on a maket with an inelastic demand and an elastic supply will cause:
a)sellers to pay the majority of the tax
b)buyers to pay the majority of the tax
c)the tax burden to be w
Take a shot. What do you think?
1.D 2.D 3.C
To determine the answer to this question, you need to understand the concepts of price elasticity of demand and supply.
Elasticity refers to the sensitivity of quantity demanded or supplied to changes in price. If demand or supply is elastic, it means that a small change in price leads to a proportionately larger change in quantity demanded or supplied. Conversely, if demand or supply is inelastic, it means that a change in price leads to a relatively smaller change in quantity demanded or supplied.
In this case, you stated that the demand is inelastic and the supply is elastic. Let's analyze the possible outcomes:
a) Sellers pay the majority of the tax: If supply is elastic, it indicates that the sellers have the ability to respond more easily to price changes. When a tax is imposed, the sellers can adjust their prices to offset the cost of the tax. Since demand is inelastic, buyers are less responsive to price changes. As a result, sellers can pass on a larger portion of the tax burden to buyers, minimizing the impact on their own profits. This makes option (a) a possible correct answer.
b) Buyers pay the majority of the tax: If demand is inelastic, it means that buyers are less responsive to price changes. In this case, when a tax is imposed, sellers cannot easily increase prices without significantly reducing the demand for the product. Thus, sellers may absorb a smaller portion of the tax burden and pass on a larger portion to buyers. This makes option (b) a possible correct answer.
c) The tax burden to be evenly split: This option assumes that both the demand and supply are equally responsive to price changes. If this were the case, the tax burden would indeed be evenly distributed between sellers and buyers. However, since you stated that demand is inelastic and supply is elastic, it is less likely for the tax burden to be evenly split. So, option (c) is less likely to be the correct answer.
To conclude, both options (a) and (b) are plausible scenarios when a tax is imposed on a market with inelastic demand and elastic supply. The ultimate outcome would depend on various factors, such as the relative elasticity of demand and supply, the ability of sellers to adjust prices, and the price sensitivity of buyers.