Question

In: Economics

Pretend walnuts have perfectly inelastic demand and the government imposes a 50 cent per package tax....

Pretend walnuts have perfectly inelastic demand and the government imposes a 50 cent per package tax. Who pays the tax?

walnut producers pay all of it

walnut producers and consumers will each pay part of the tax

it depends on whether the government put the tax on producers or consumers

walnut consumers pay all of it

Solutions

Expert Solution

Walnut consumers pay all of it.

Explanation:

Pretending walnuts have perfectly inelastic demand and government imposes a 50 cent per package tax,the tax is being paid by the walnut consumers entirely.Perfectly inelastic demand means price, no matter what doesn't affect the demand of the product.i.e., demand remains same and any change in price doesn't cause any change in demand.As a result, producer will be able to increase the price of their produce of the same quantity by the tax amount,being imposed by the government.Thus,entire burden of tax is bourne by the consumers.

Rahul Sunny answered 2 years ago
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