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Chapter 18: Problem 14

If supply is perfectly inelastic, a tax increase is bome (L.O7) a) only by the buyer b) only by the seller c) mostly by the buyer d) mostly by the seller

Short Answer

Expert verified
The correct answer is (b) only by the seller. In the case of a perfectly inelastic supply, the sellers cannot change the quantity they supply, and therefore, they bear the burden of an increased tax.

Step by step solution

01

Understand the Concept of Perfectly Inelastic Supply

Perfectly inelastic supply means that the quantity supplied by the seller does not change, no matter the price. In this case, the supply curve is a vertical line.
02

Understand the Concept of Tax Impact

In most cases, when a tax is introduced or increased, the burden is divided among buyers and sellers depending on the elasticity of demand and supply. The side of the market that is less elastic ends up bearing most of the tax burden.
03

Apply the Concept

Recognize that because supply is perfectly inelastic, the sellers cannot change the quantity they supply and therefore cannot escape from the burden of the tax. Therefore, an increased tax, in this case, is borne by the sellers. This means that option (b) only by the seller, is the correct answer.
04

Confirm answer

To further confirm this, one could draw a graph with the quantity on the x-axis and the price on the y-axis, mark the tax as a vertical line representing the perfectly inelastic supply, and show how taxes are absorbed by the suppliers rather than being passed on to buyers. This would visually confirm answer (b) as the correct response.

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Most popular questions from this chapter

Demand is elastic if (LO1) a) percentage change in quantity is greater than percentage change in price b) percentage change in price is greater than percentage change in quantity c) percentage change in quantity demand is zero d) percentage change in price is zero e) percentage change in quantity is equal to percentage change in price

About how much of the tax is paid by consumers in the form of higher prices? (LO7) a) 10 cents d) 50 cents b) 20 cents e) 65 cents c) 35 cents

Movie tickets and DVD rentals are services. (LO4) a) inferior b) complementary c) substitute d) highly inelastic

When demand is relatively inelastic and supply is relatively elastic, the burden of a tax will be borne ( \(\mathrm{OO})\) a) mainly by sellers b) mainly by buyers c) equally between sellers and buyers d) it is impossible to determine the relative burdens of the tax

When the cross elasticity of demand for two services is negative, then these services are (LO4) a) complements b) substitutes c) both complements and substitutes d) neither complements nor substitutes
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