A local government is considering a 10 percent tax on items A, B, and C. They want to tax only those goods for which the burden of the tax is lowest on suppliers. They know that the elasticity of supply of all the suppliers in question is about equal and have observed that when the price of A, B, and C rose 10 percent, total sales receipts for A and B rose 2 percent but declined 2 percent for C. From this information, they should:

Question

Quizplus · Accepted Answer

The increase in total sales receipts for A and B when prices rose indicates that the demand for these goods is inelastic, meaning consumers are less sensitive to price changes. Therefore, the tax burden will fall more on consumers than suppliers for A and B. Conversely, the decline in total sales receipts for C suggests that demand is elastic, meaning consumers are more sensitive to price changes, and the tax burden would fall more on suppliers.

A Local Government Is Considering a 10 Percent Tax on Items