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Chapter 6: Problem 13

When demand is perfectly elastic, a tax increase is borne (LO7) a) only by the buyer c) mostly by the buyer b) only by the seller d) mostly by the seller

Short Answer

Expert verified
In the case of perfectly elastic demand, the burden of a tax increase falls entirely on the sellers, as buyers are highly responsive to price changes and any price increase would lead to an infinite drop in quantity demanded. Thus, the short answer is: b) only by the seller

Step by step solution

01

Understand Perfectly Elastic Demand

Perfectly elastic demand refers to a market situation where the quantity demanded of a good or service is responsive to any change in its price. In this case, even a small change in the price will lead to an infinite change in the quantity demanded. Graphically, this can be represented as a horizontal demand curve.
02

Analyze the Impact of Tax Increase

When a tax is imposed on a good, it leads to an increase in the price, which affects both buyers and sellers. The incidence of a tax (or how much of the tax burden is carried by the buyer and the seller) depends on the responsiveness of the quantity demanded and supplied to the price changes, or the elasticity of demand and supply.
03

Determine the Tax Burden on Buyers and Sellers

In the case of perfectly elastic demand, buyers are highly responsive to price changes. When a tax is imposed, sellers try to pass it on to the buyers by increasing the price. However, because the demand is perfectly elastic, any increase in price will cause the quantity demanded to drop infinitely. As a result, sellers cannot increase the price without losing all their customers. This implies that the burden of the tax falls entirely on the sellers, due to the highly responsive nature of the demand. Therefore, the correct answer to this question is: b) only by the seller

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Most popular questions from this chapter

A perfectly elastic supply curve is (LO1) a) a horizontal line b) a vertical line c) neither a horizontal nor a vertical line

When demand is relatively inelastic and supply is relatively elastic, the burden of a tax will be borne (LO7) 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

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