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Chapter 5: Q. 20 (page 130)

Under which circumstances does the tax burden fall entirely on consumers?

Short Answer

Expert verified

When demand is more inelastic than supply

Step by step solution

01

Step 1. Definition

Tax coverage means the final tax burden or the final tax coverage. Tax coverage may be on consumers or producers. The share of the tax burden is determined by the elasticity of demand and supply of the product.

02

Step 2. Explanation

When the demand is highly inelastic to price changes, the burden of taxes would fall mostly on the consumers. This is because the producers would increase their prices and decrease in quantity demanded as result would be less proportionate.

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Most popular questions from this chapter

The equation for a demand curve is P = 2/Q. What

is the elasticity of demand as price falls from 5 to 4?

What is the elasticity of demand as the price falls from 9

to 8? Would you expect these answers to be the same?

The supply of paintings by Leonardo Da Vinci, who painted the Mona Lisa and The Last Supper and died in 1519, is highly inelastic. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that demand for these paintings will determine the price.

Would you expect supply to play a more significant

role in determining the price of a basic necessity like

food or a luxury like perfume? Explain. Hint: Think

about how the price elasticity of demand will differ

between necessities and luxuries.

What is the price elasticity of demand? Can you explain it in your own words?

What is the formula for the cross-price elasticity of demand?
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