Question

If a tax is levied on a market with highly elastic demand and inelastic supply,

a. it is impossible to determine how the tax burden is divided.
b. the buyer will bear most of the tax burden.
c. the seller will bear most of the tax burden.
d. the tax burden will be divided equally between sellers and buyers.

Answer 1

In a market with highly elastic demand and inelastic supply, the tax burden falls mostly on the seller, as they cannot pass the additional costs onto consumers through price increases.

Step-by-step explanation:

Direct answer: c. the seller will bear most of the tax burden.

Explanation: In a market scenario where demand is highly elastic and supply is inelastic, the tax burden primarily falls on the seller. Highly elastic demand means that consumers are very responsive to price changes and will significantly reduce their quantity demanded if the price rises.

On the other hand, inelastic supply indicates that producers cannot easily change the quantity supplied in response to price changes. Due to this, sellers will bear most of the tax burden because they have less flexibility to pass the tax on to consumers through higher prices. As a result, the equilibrium quantity is affected minimally, but the sellers receive lower prices for their products or services, absorbing a larger portion of the tax.