Asked by Jeremiah Antoine on May 21, 2024
Verified
Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of demand for X is unitary (coefficient = 1) . If the incidence of the tax is such that consumers pay $0.20 of the tax and the producers pay $1.80, we can conclude that the
A) supply of X is inelastic.
B) supply of X is elastic.
C) supply of X is unitary elastic.
D) demand for X is elastic.
Price Elasticity
A measure of how much the quantity demanded of a good responds to a change in the price of that good, expressed as a percentage change.
Excise Tax
A tax levied on specific goods or commodities sold within a country, such as alcohol and cigarettes.
- Assimilate the effect of elasticity on the incidence rate of excise taxes.
Verified Answer
JW
Jordyn WilliamsMay 23, 2024
Final Answer :
A
Explanation :
When the incidence of the tax falls more heavily on producers ($1.80) than on consumers ($0.20), it indicates that the supply of product X is relatively inelastic compared to its demand. This is because producers are unable to pass on much of the tax to consumers, likely due to the inability to reduce their quantity supplied significantly in response to the tax.
Learning Objectives
- Assimilate the effect of elasticity on the incidence rate of excise taxes.