Refer to Figure 6-15. In which market will the majority of the tax burden fall on buyers?

• A. A market where demand is relatively inelastic and supply is relatively elastic
• B. A market where both demand and supply are perfectly inelastic
• C. A market where both demand and supply are equally elastic
• D. A market where demand is relatively elastic and supply is relatively inelastic

Answer: (A)

Verified step by step guidance

1. Understand the concept of tax incidence, which refers to how the burden of a tax is divided between buyers and sellers in a market.
2. Recall that the tax burden falls more heavily on the side of the market (buyers or sellers) that is relatively more inelastic because that side is less responsive to price changes and cannot easily avoid the tax.
3. Analyze the elasticity of demand and supply: if demand is relatively inelastic and supply is relatively elastic, buyers cannot easily reduce their quantity demanded when the price rises, so they bear more of the tax burden.
4. Consider the other options: if both demand and supply are perfectly inelastic, both buyers and sellers bear the tax equally; if both are equally elastic, the tax burden is shared evenly; if demand is elastic and supply is inelastic, sellers bear more of the tax burden.
5. Conclude that the majority of the tax burden falls on buyers in the market where demand is relatively inelastic and supply is relatively elastic.