In an industry, (1) demand is perfectly inelastic and (2) supply is perfectly elastic. If a tax is imposed in this industry, ________ bear the entire burden of the tax and equilibrium quantity ________. (Fill in the blanks.)

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BlackTom AI · Accepted Answer

First, let's restate the scenario and the options to ensure clarity. The industry has (1) demand that is perfectly inelastic and (2) supply that is perfectly elastic. A tax is imposed, and we are asked who bears the burden and how the equilibrium quantity changes.

Option A: buyers, decreases. This would assert that buyers pay the tax but that the quantity falls. However, with perfectly inelastic demand, the quantity demanded does not respond to price changes; consumers still buy the same amount regardless of price. Therefore, quantity cannot decrease as a result of the tax, making this option inconsistent with the given demand condition.

Option B: buyers, is unchanged. Here, buyers bear the entire tax because the demand curve is a vertical line (perfectly inelastic), so any tax shifts the price paid by buyers by the full amount while the quantity remains exactly the same. Since price changes do not affect quantity when demand is perfectly inelastic, this description aligns with the theory.

Option C: sellers, decreases. This would claim that producers pay the tax and that quantity falls. With perfectly elastic supply, producers are willing to supply any quantity at the pre-tax price, so the tax does not reduce quantity. Instead, the burden falls on buyers, not sellers, so this option contradicts the elasticity characteristics described.

Option D: sellers, is unchanged. While it is true that the quantity does not change under perfectly inelastic demand, this option incorrectly assigns the tax burden to sellers. The combination of perfectly inelastic demand and perfectly elastic supply implies buyers bear the tax, not sellers, so this option is incorrect.

In summary, the key ideas are: a perfectly inelastic demand means quantity is unaffected by price, a perfectly elastic supply means sellers can supply any quantity at the same price, and under a tax in such a setup, the burden falls entirely on buyers with the quantity remaining unchanged. The options that assign the burden to sellers or that claim a quantity change conflict with these fundamental implications.

ECON 1101 In-Class Activity 4 (Lectures): Government Policies and Efficiency of Market Outcomes

In an industry, (1) demand is perfectly inelastic and (2) supply is perfectly elastic. If a tax is imposed in this industry, bear the entire burden of the tax and equilibrium quantity . (Fill in the blanks.)

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ECON 1101 In-Class Activity 4 (Lectures): Government Policies and Efficiency of Market Outcomes

In an industry, (1) demand is perfectly inelastic and (2) supply is perfectly elastic. If a tax is imposed in this industry, ________ bear the entire burden of the tax and equilibrium quantity ________. (Fill in the blanks.)

View Explanation

Log in for full answers

Similar Questions

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After the government imposed a $0.20 per gallon tax on gasoline, the price of a gallon of gasoline increased from $1.00 to $1.15. Which of the following statements is true?

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More Practical Tools for Students Powered by AI Study Helper

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In an industry, (1) demand is perfectly inelastic and (2) supply is perfectly elastic. If a tax is imposed in this industry, bear the entire burden of the tax and equilibrium quantity . (Fill in the blanks.)

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