Suppose that an excise tax of $1 is levied on the sale of a gallon of gas. Most of this tax will be borne by the buyer rather than the seller if the price elasticity of demand for gas equals
A) 0.4
B) 1.2
C) 1.4
D) 2.0

Question

Quizplus · Accepted Answer

When the price elasticity of demand is low (in this case, 0.4), it means that consumers are not very responsive to price changes. Therefore, if an excise tax is levied on a product with inelastic demand, the buyers are more likely to bear most of the tax burden because they will continue to buy the product despite the price increase.

Suppose That an Excise Tax of $1 Is Levied on the Sale