Asked by nikki scalera on Jun 25, 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 the producers of X pay $1.75 of the tax and the consumers pay $0.25, 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 sensitive the demand or supply of a product is to changes in price, indicating how quantities demanded or supplied respond to price changes.
Excise Tax
A tax applied to specific goods, such as alcohol and tobacco, typically to discourage their consumption or raise government revenue.
- Understand the influence of elasticity on the burden of excise taxes.
Verified Answer
QM
Quinn MenziesJul 01, 2024
Final Answer :
A
Explanation :
When the producers bear the majority of the tax burden ($1.75 out of $2), it indicates that the supply of product X is relatively inelastic. This is because producers cannot easily adjust their quantity supplied in response to the tax, leading them to absorb a larger portion of the tax burden.
Learning Objectives
- Understand the influence of elasticity on the burden of excise taxes.