If an excise tax is placed on a product that has a perfectly inelastic demand, then:
A) the entire tax will be paid by the consumer.
B) the entire tax will be paid by the producer.
C) the consumer and producer will each pay a share of the tax.
D) the incidence of the tax cannot be determined unless we know the coefficient of price elasticity of supply.

Question

Quizplus · Accepted Answer

When demand is perfectly inelastic, consumers are willing to buy the same quantity regardless of price changes. Therefore, if an excise tax is placed on such a product, consumers will bear the entire cost of the tax, as their demand does not decrease with an increase in price.

If an Excise Tax Is Placed on a Product That