The demand for insulin is quite inelastic. The demand for Pepsi is quite elastic. Suppose the elasticity of supply for insulin is the same as the elasticity of supply for Pepsi. If a $0.20 tax was imposed on each of these goods (holding everything else constant), which consumers would pay more of the tax?

Question

Quizplus · Accepted Answer

The demand for insulin is inelastic, meaning that consumers are less responsive to changes in price. If a tax is imposed on insulin, the price will increase and the quantity demanded will decrease, but to a lesser extent than in the case of Pepsi. Therefore, the burden of the tax will fall more heavily on insulin consumers. The elasticity of supply is not relevant to the question of incidence of the tax.

The Demand for Insulin Is Quite Inelastic