Question

The price elasticity of demand for a particular cancer drug is zero and the price elasticity of supply is 0.50. If a $1 excise tax is levied on producers, how much of this tax will eventually be paid by consumers?

Answer 1

$1 or 100% of the tax

Step-by-step explanation:

When the price elasticity of demand is 0, it means that the good or service will be purchased regardless of its cost. Very few things have such a low price elasticity, and the fact that this is drug for treating cancer is the reason why that happens. Anyone that can purchase a drug that will keep you alive, will do so as long as you have enough money to do so. Another good with a very low price elasticity, but not 0, is gasoline with a 0.02 to 0.04, and gasoline is a basic necessity also.

The curve for a perfectly inelastic good is vertical. So any increase in taxes will be paid by the customers.