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Elasticity and Taxes quiz

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  • What determines how the tax burden is split between consumers and producers?
    The tax burden is split based on the price elasticity of demand and supply; the more inelastic side bears more of the tax.
  • How does the price elasticity of demand affect tax incidence?
    If demand is more inelastic, consumers bear a larger portion of the tax burden.
  • What happens to tax incidence when supply is elastic and demand is inelastic?
    Consumers pay more of the tax because their demand is less sensitive to price changes.
  • Who bears more of the tax when supply is inelastic and demand is elastic?
    Sellers bear more of the tax because their supply is less responsive to price changes.
  • What is the general rule for which side of the market bears more tax?
    The side of the market that is more inelastic bears a higher tax incidence.
  • What does perfectly elastic demand mean for tax incidence?
    Suppliers bear the entire tax burden because consumers will not buy at a higher price.
  • What does perfectly inelastic demand mean for tax incidence?
    Consumers bear the entire tax burden because they will pay any price for the product.
  • How is the price elasticity of demand calculated?
    It is the percentage change in quantity demanded divided by the percentage change in price.
  • How is the price elasticity of supply calculated?
    It is the percentage change in quantity supplied divided by the percentage change in price.
  • What happens to the market when both demand and supply are elastic or inelastic?
    The tax burden is shared more evenly, but the more inelastic side still pays more.
  • Why do inelastic consumers or producers bear more of the tax burden?
    Because they are less able to leave the market when prices change, so they must absorb more of the tax.
  • What is an example of a product with inelastic demand?
    A life-saving drug or cigarettes, where consumers will buy regardless of price increases.
  • If a tax is imposed and the demand curve is perfectly elastic, what happens to the price buyers pay?
    The price buyers pay stays the same; sellers receive less by the full amount of the tax.
  • If a tax is imposed and the demand curve is perfectly inelastic, what happens to the price buyers pay?
    Buyers pay the entire tax, so the price they pay increases by the full amount of the tax.
  • What is the main takeaway about tax incidence and elasticity?
    The more inelastic side of the market always bears a greater share of the tax burden.