There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption.Assume for simplicity that all bottled soft drinks are the same size.Suppose the initial market equilibrium is P = $2.00 and Q = 1000. FIGURE 4-4
-Refer to Figure 4-4.Suppose the government imposes a tax of $0.60 per soft drink purchased.Which of the following statements most accurately describes the economic incidence of this tax?
A)The consumer bears more of the burden because demand is elastic relative to supply.
B)The seller bears more of the burden because supply is inelastic relative to demand.
C)The consumer bears more of the burden because demand is inelastic relative to supply.
D)The seller bears more of the burden because supply is elastic relative to demand.
E)The burden is shared equally between consumer and seller because the slopes of the supply and demand curves are the same.

Question

There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption.Assume for simplicity that all bottled soft drinks are the same size.Suppose the initial market equilibrium is P = $2.00 and Q = 1000.  FIGURE 4-4
-Refer to Figure 4-4.Suppose the government imposes a tax of $0.60 per soft drink purchased.Which of the following statements most accurately describes the economic incidence of this tax?
A)The consumer bears more of the burden because demand is elastic relative to supply. 
B)The seller bears more of the burden because supply is inelastic relative to demand. 
C)The consumer bears more of the burden because demand is inelastic relative to supply. 
D)The seller bears more of the burden because supply is elastic relative to demand. 
E)The burden is shared equally between consumer and seller because the slopes of the supply and demand curves are the same.

Quizplus · Accepted Answer

When demand is inelastic relative to supply, consumers are less sensitive to price changes, and so they continue to purchase the same quantity of soft drinks even when the price increases due to the tax. As a result, the burden of the tax falls more heavily on consumers, who end up paying a higher price for the same quantity of soft drinks. In this case, the price paid by consumers increases by $0.60 to $2.60, while the price received by sellers decreases by $0.40 to $1.60. The quantity demanded also decreases, but the extent of the decrease depends on the exact elasticity of demand. Overall, the economic incidence of the tax is determined by the relative elasticities of demand and supply, and in this case, the burden falls more heavily on consumers because demand is inelastic relative to supply.

There Have Been Proposals That a Tax Be Imposed on Sugar-Laden