Question

10. If the price elasticity of demand for a good is zero, and the supply for that good is relatively price elastic, imposing a tax on the sellers of that good will result in the following effect:

which one is the correct answer

A. Buyers pay the entire tax

B. Sellers pay the entire tax

C. The tax is split between buyers and sellers

D. The tax has no effect on the price of that good

E. We cannot say what the effect of imposing a tax will be

Answer 1

Option A.

• When the price elasticity of demand is zero and if the supply for the good is price elastic, we can say that the supply of a good is more price elastic while the demand is more price inelastic.
• When supply is price elastic, the buyers pay the entire tax even though the entire tax burden falls on them at first.
• This is because, when the supply is relatively price elastic and when the tax is imposed on them, their cost of production increases which in turn decreases their supply and they earn relatively less profits.
• Hence to earn enough profits and to remain in business, the firms transfer their burden of tax completely on their customers by increasing the rates of their goods, which forces the buyer's to pay the entire tax.