Question

Which of the following statements is (are) correct?
(x) If the demand curve is perfectly inelastic, then buyers bear the entire burden of the tax and the price kept by the seller after the tax is imposed is the same amount as they kept before the tax was imposed
(y) If the supply curve is perfectly inelastic, then sellers bear the entire burden of the tax and the price paid by buyers is the same after the tax is imposed as the amount buyers paid before the tax was imposed
(z) If the demand curve is perfectly inelastic, then government will not be able to collect any tax revenue since buyers bear the entire burden of the tax.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

The demand for salt is price inelastic and the supply of salt is price elastic. The demand for caviar is price elastic and the supply of caviar is price inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of these taxes will be paid by the _________ of salt and the ________ of caviar.
A. sellers: buyers
B. sellers; sellers
C. buyers; sellers
D. buyers; buyers
E. B or D, only

Answer 1

1. The first statement is only partially true.

When a tax is imposed on a good whose demand is perfectly inelastic , the entire tax burden falls on consumer. So whatever the tax imposed, the whole of it is incident on consumer. Therefore, the price tax paid after tax is greater than price paid before tax.

First part of the first statement is right, second part is wrong.

The second statement is right. When a tax is imposed on a good whose supply is inelastic, the entire tax burden falls on the seller. Since the entire tax burden is incident on the seller, they cannot change the price charged. Hence price paid after tax = price paid before tax

The third statement is wrong. When a tax is imposed on a perfectly demand inelastic good, then the entire tax burden is incident on the buyer. The seller increases the price of the good by total tax that is imposed on the good.

If t is tax on the good and p is the price before tax, then the consumer has to pay p + t.

The govt collects the t amount from the seller.

So only y is right

E is the correct answer.

2. Following the same logic in question 1, most tax on salt would be paid by buyers since it's demand is price inelastic

Most tax on caviar would be paid by seller since it's supply is price inelastic