Asked by Tanyushka Little on May 21, 2024
Verified
Assume the demand for automobile tires is highly inelastic and that the supply is highly elastic. The burden of a $2 excise tax on each tire will be
A) borne by resource suppliers that provide the inputs for manufacturing tires.
B) shared about equally by buyers and sellers of tires.
C) borne primarily by buyers of tires.
D) borne primarily by sellers of tires.
Highly Inelastic
Describes a situation where demand or supply shows little to no response to changes in price, often due to the lack of close substitutes.
Highly Elastic
Describes a market situation where demand or supply of a good or service is very sensitive to changes in price.
Excise Tax
A tax imposed on the sale of specific goods and services, such as fuel, tobacco, and alcohol.
- Understand the functions of demand and supply price elasticity in deciding the distribution of tax liability.
Verified Answer
SJ
Sandra JoshyMay 25, 2024
Final Answer :
C
Explanation :
When demand is highly inelastic and supply is highly elastic, the burden of an excise tax falls primarily on buyers because their demand does not decrease significantly with a price increase, whereas sellers can easily adjust their production and are less affected by the tax.
Learning Objectives
- Understand the functions of demand and supply price elasticity in deciding the distribution of tax liability.