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Chapter 18: Problem 16

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

Short Answer

Expert verified
In this scenario, where demand is relatively inelastic and supply is relatively elastic, the burden of a tax will be borne mainly by buyers.

Step by step solution

01

Understand Price Elasticity of Demand and Supply

Price Elasticity of Demand (PED) measures how the quantity demanded changes in response to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Demand is considered inelastic when the PED is less than 1, meaning that the quantity demanded is not very responsive to price changes. Price Elasticity of Supply (PES) measures how the quantity supplied changes concerning a change in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply is considered elastic when the PES is greater than 1, meaning that the quantity supplied is quite responsive to price changes.
02

Recall Tax Incidence Theory

Tax incidence is the distribution of the burden of a tax between the buyers and sellers in a market. The tax burden falls on the party with the more inelastic (less responsive) price elasticity. This implies that the party with greater responsiveness to price changes (elasticity) will be able to avoid bearing the tax burden to a greater extent, as they can adjust the quantity supplied or demanded more easily when the price changes.
03

Determine the Party Bearing the Tax Burden in the Given Scenario

As mentioned in the exercise, the demand is relatively inelastic, and the supply is relatively elastic. This means that in this scenario, the buyers (demand) are less responsive to price changes than the sellers (supply). Hence, the taxation will cause prices to increase, leading to a relatively more significant decrease in the quantity supplied compared to the quantity demanded. Consequently, the burden of the tax will fall mainly on the party with more inelastic (less responsive) price elasticity, which, in this case, is the buyers. In conclusion: b) mainly by buyers

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Most popular questions from this chapter

If demand is inelastic and price is raised, total revenuc will \((1.03)\) a) rise b) fall c) stay the same d) possibly rise or possibly fall

If our income elasticity for vacation trips is \(2.8\), we may conclude that vacation trips are (LOl) a) a normal service b) an inferior scrvice c) both a normal service and an inferior service d) neither a normal service nor an inferior service

Statement L. A perfectly elastic demand curve has an elasticity of zero. Statement II. When demand is elastic and price is raised, total revenue will fall. (LOl) a) Statement I is truc, and statement II is false. b) Statcment II is true, and statement I is false. c) Both statements are true. d) Roth statements are false.

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 the sellers? (LO7) a) 80 cents d) 35 cents b) 65 cents e) 10 cents c) 50 cents
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