Suppose that demanders were inelastic and suppliers were elastic.

Question

BlackTom AI · Accepted Answer

The question asks us to consider the tax incidence when demand is inelastic and supply is elastic. This situation influences who bears more of the tax burden because the more inelastic side bears a larger share of the tax.
Option 1: 'Both demanders and suppliers would bear some of the burden, but the tax burden would be more than 50% for demanders and less than 50% for suppliers.' This aligns with the core principle of tax incidence: the side of the market with the less elastic (more inelastic) response to price changes bears a larger portion of the tax. Since demand is inelastic, consumers respond less to price changes, so they end up shouldering more than half of the tax burden, while suppliers, facing elastic supply, absorb less than half.
Option 2: 'The tax burden would be borne entirely by suppliers.' This would be true if supply were perfectly inelastic and demand perfectly elastic, or in a scenario where the tax shifts entirely to one side due to extreme rigidity. However, in this case, demand is inelastic and supply is elastic, so the burden cannot be entirely on suppliers. The asymmetric elasticities indicate some burden on both sides, with the inelastic side taking more.
Option 3: 'Both demanders and suppliers would bear some of the burden, but the tax burden would be more than 50% for suppliers and less than 50% for demanders.' This reverses the intuition. Since demand is inelastic, consumers are less responsive to price changes and thus should bear a larger share of the tax, not suppliers. The more elastic side (suppliers) would absorb a smaller portion of the tax.
Option 4: 'The tax burden would be borne entirely by demanders.' This overstates the case in the given elasticity pattern. While demanders bear more, the tax does not fall entirely on them when the other side is elastic; some burden must be shared with suppliers because the price change due to the tax affects both sides of the market, albeit to different extents. The elastic supply means suppliers will adjust quantity and price, sharing some of the burden.
Overall, the reasoning matches the standard tax-incidence result: when demand is inelastic and supply is elastic, the burden falls more heavily on demanders but is not exclusive to them, with both sides sharing some of the tax.

Suppose that demanders were inelastic and suppliers were elastic.Single choice

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