Question

Suppose the government imposes a $2 on this market.

Suppose D1 represents the demand curve for paperback novels, D2 represents the demand curve for gasoline, and S1 represents the supply curve for paperback novels and gasoline. After the imposition of the $2 on paperback novels and on gasoline, the:

(A)
buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels.
(B)
sellers of gasoline bear a higher burden of the $2 tax than sellers of paperback novels.

(C)
buyers of gasoline bear an equal burden of the $2 tax as buyers of paperback novels.

(D)
Both a) and b) are correct.

Answer 1

A) buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels.

Step-by-step explanation:

The flatter the demand curve, the more elastic. In this case, D2, the demand curve for gasoline is more steeper which means it is more inelastic. Also, S2, the supply curve for gasoline is extremely elastic since it is almost horizontal.

When a tax is imposed on a good, the largest burden will fall on the side (suppliers or consumers) whose demand or supply curve is more inelastic. When a curve is inelastic, it means that a 1% price change will affect the quantity demanded in a smaller proportion.