If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax?

Question

BlackTom AI · Accepted Answer

To tackle this question, I’ll walk through each answer choice and explain the logic behind why it is or isn’t correct, given inelastic demand and elastic supply with a sales tax increase.
Option 1: 'Both consumers and producers will share the burden of the tax equally.' This would imply a roughly 50/50 tax incidence, which occurs only if the elasticities of demand and supply are similar. Since demand is inelastic and supply is elastic, the burden does not split equally; the more inelastic side bears more of the burden. Therefore this statement is incorrect.
Option 2: 'Producers will bear most of the burden of the tax or risk losing sales.' With elastic supply, producers can adjust quantities and largely avoid bearing the tax; they can reduce quantity and pass costs to consumers when possible. In contrast, because demand is inelastic, consumers are less responsive to price changes and end up absorbing more of the tax. So this option misidentifies the burden distribution and is false.
Option 3: 'The price of the good will not change.' A tax on a good typically shifts the supply curve upward by the tax amount, leading to a higher price for buyers and/or a lower price received by sellers. In this scenario, with inelastic demand, consumers’ price increases more noticeably, so claiming no price change is incorrect.
Option 4: 'Consumers will bear most of the burden of the tax.' This aligns with standard incidence analysis: when demand is inelastic relative to supply, consumers bear a larger share of the tax burden because their quantity demanded doesn’t drop much in response to price increases. The tax reduces consumer welfare more than producer welfare in this case, making this statement correct.
Option 5: 'Producers will bear all of the burden of the tax.' Incidence is never completely on the producer when demand is inelastic but not perfectly inelastic and supply is elastic; producers cannot shoulder the entire burden in typical market conditions. This overstates the producer burden and is therefore incorrect.
In summary, the key insight is that the tax burden falls more heavily on the side of the market that is less responsive to price changes. Since demand is inelastic and supply is elastic, consumers end up bearing the larger share of the tax, which makes Option 4 the correct choice. The other options misstate how elasticity affects tax incidence and the resulting price changes.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax?

查看解析

登录即可查看完整答案

类似问题

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?

Figure 6-11 Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct?

Figure 6-11 Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

Use the following graph for a competitive market to answer the question below. Assume the government imposes a $2.25 tax on suppliers, which results in a shift of the supply curve from to . The amount of the tax paid by the seller is

Use the following graph for a competitive market to answer the question below. Assume the government imposes $2.25 tax on suppliers, which results in a shift of the supply curve from to . The price the consumer pays for the product after the tax is imposed on the suppliers is

Use the following graph for a competitive market to answer the question below. Assume the government imposes a $3 tax on buyers, which results in a shift of the demand curve from to . The amount of the tax paid by the seller is

In 2020 to provide some relief to the airline industry, the Cares Act temporarily suspended (eliminated) per-unit taxes on the transportation of people and goods by air in the U.S. Then, if the supply of air travel was much less elastic than the demand,

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

If the market demand for a good is inelastic and the supply is elastic, which of the following is true when there is an increase in sales tax?

查看解析

登录即可查看完整答案

类似问题

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?

Figure 6-11 ​ Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct?

Figure 6-11 ​ Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

Use the following graph for a competitive market to answer the question below. Assume the government imposes a $2.25 tax on suppliers, which results in a shift of the supply curve from to . The amount of the tax paid by the seller is

Use the following graph for a competitive market to answer the question below. Assume the government imposes $2.25 tax on suppliers, which results in a shift of the supply curve from to . The price the consumer pays for the product after the tax is imposed on the suppliers is

Use the following graph for a competitive market to answer the question below. Assume the government imposes a $3 tax on buyers, which results in a shift of the demand curve from to . The amount of the tax paid by the seller is

In 2020 to provide some relief to the airline industry, the Cares Act temporarily suspended (eliminated) per-unit taxes on the transportation of people and goods by air in the U.S. Then, if the supply of air travel was much less elastic than the demand,

更多留学生实用工具

希望你的学习变得更简单

Figure 6-11 Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct?

Figure 6-11 Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?