Consider a good whose own price elasticity of demand is 0 and price elasticity of supply is 1. The fraction of a specific tax that will be passed through to consumers is:
A) 0
B) 0.25
C) 0.5
D) 0.75
E) 1

Question

Quizplus · Accepted Answer

The fraction of a specific tax passed through to consumers depends on the price elasticities of demand and supply. With a price elasticity of demand of 0 (perfectly inelastic demand) and a price elasticity of supply of 1, the entire tax is passed on to consumers. This is because consumers are completely unresponsive to price changes (due to the elasticity of demand being 0), while suppliers can adjust their quantity supplied perfectly to price changes (due to the elasticity of supply being 1), leading to consumers bearing the full burden of the tax.

Consider a Good Whose Own Price Elasticity of Demand Is