Question

From the following quotations, what, if anything, can you conclude about elasticity of demand? "Good weather resulted in record wheat harvests and sent wheat prices tumbling. The result has been disastrous for many wheat farmers."

Excise taxes are sometimes referred to as "sin taxes" when applied to products such as alcohol and cigarettes. Using the concepts of elasticity of demand and supply, explain how we could determine whether it is the consumer or the producer that is bearing the burden of such a tax.

Answer 1

The quotations do not explicitly mention elasticity of demand. However, we can infer from the wheat example that demand for wheat may be relatively elastic. The example of excise taxes on products like alcohol and cigarettes demonstrates tax incidence and how it relates to elasticity of demand and supply.

Step-by-step explanation:

The quotations provided do not explicitly mention anything about the elasticity of demand. However, we can infer from the statement about good weather resulting in record wheat harvests and sent wheat prices tumbling that the demand for wheat may be relatively elastic. When an increase in supply (due to good weather) leads to a significant decrease in price, it suggests that the demand for wheat is responsive to price changes. On the other hand, the statement about excise taxes on products like alcohol and cigarettes demonstrates the concept of tax incidence and how it relates to elasticity of demand and supply. When demand is inelastic, the tax burden mainly falls on consumers in the form of higher prices. This is because consumers are less responsive to changes in price, so producers can pass on the higher tax costs.