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Chapter 5: Q. 20 (page 130)

Under which circumstances does the tax burden fall entirely on consumers?

Short Answer

Expert verified

When demand is more inelastic than supply

Step by step solution

01

Step 1. Definition

Tax coverage means the final tax burden or the final tax coverage. Tax coverage may be on consumers or producers. The share of the tax burden is determined by the elasticity of demand and supply of the product.

02

Step 2. Explanation

When the demand is highly inelastic to price changes, the burden of taxes would fall mostly on the consumers. This is because the producers would increase their prices and decrease in quantity demanded as result would be less proportionate.

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Most popular questions from this chapter

Economists define normal goods as having a

positive income elasticity. We can divide normal goods

into two types: Those whose income elasticity is less

than one and those whose income elasticity is greater

than one. Think about products that would fall into each

category. Can you come up with a name for each

category?

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.

Describe the general appearance of a demand or a supply curve with zero elasticity.

Assume that the supply of low-skilled workers is fairly elastic, but the employers’ demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams

Say that a certain stadium for professional football has 70,000 seats. What is the shape of the supply curve for tickets to football games at that stadium? Explain.
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