Assuming the demand curve is more elastic (flatter) than the supply curve, which of the following is true ?
A) The full tax is always passed to the consumer no matter how flat (elastic) the demand curve is.
B) The full tax is always passed to the seller no matter how flat (elastic) the demand curve is.
C) The smaller the portion of a sales tax that is passed to the consumer.
D) It does not make any difference how flat (elastic) the demand curve is; the tax is always split evenly between buyer and seller.

Question

Quizplus · Accepted Answer

The flatter the demand curve, the more sensitive consumers are to changes in price. Therefore, when a sales tax is added to the price of a product, consumers will be more likely to switch to substitutes or reduce their consumption. As a result, sellers will have to absorb some of the tax in the form of lower prices or lower profits. The portion of the tax that is passed to the consumer will be smaller, and the portion absorbed by the seller will be larger. Therefore, choice C is the best answer.

Assuming the Demand Curve Is More Elastic (Flatter) Than the Supply