A few years ago, the city of Seattle, Washington, considered imposing a specific tax on all espresso-based coffee drinks sold in the city. The extra tax revenue generated would have been used to fund after-school programs for low-income children. The coffee-house owners (firms) agreed that this would be a good program to fund, but they argued that the tax would sharply reduce their sales volume and they would pay most of the tax burden. This claim is true if:

A) the demand for espresso-based coffee is more inelastic than supply.
B) the demand for espresso-based coffee is more elastic than supply.
C) there are no close substitutes for espresso-based coffee drinks.
D) espresso-based coffee drinks can be produced at constant marginal cost.

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Julisa Ramos · Accepted Answer

Final Answer : B, Explanation :  If the demand for espresso-based coffee is more elastic than supply, then the burden of the tax will fall more heavily on the consumers (in the form of lower sales volume) than on the coffee-house owners. This is because when the demand is elastic, consumers are more sensitive to changes in price and are more likely to switch to substitutes or reduce their overall consumption, causing a greater decline in sales volume. Therefore, if the tax is implemented, the coffee-house owners will not pay most of the tax burden unlike what they argued.

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