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Consider the following statements about impact of tax:
1. A tax is shifted forward to consumers if the demand is inelastic relative to supply.
2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand.
1. A tax is shifted forward to consumers if the demand is inelastic relative to supply.
2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand.
Q. Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
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Verified Answer
Consider the following statements about impact of tax:1. A tax is shif...
- Both the statements are correct with reference to tax impact on inelasticity of supply and demand.
- A tax will shift forward to consumers if the demand is inelastic relative to supply and tax will shift backward to producers if the supply is relatively more inelastic than demand.
Most Upvoted Answer
Consider the following statements about impact of tax:1. A tax is shif...
Statement 1: A tax is shifted forward to consumers if the demand is inelastic relative to supply.
When the demand for a product is inelastic (not very responsive to price changes), it means that consumers are willing to pay a higher price for the product regardless of the tax. In this case, if a tax is imposed on the product, the producers can pass on the burden of the tax to the consumers by increasing the price. This is because consumers are not very sensitive to price changes and are willing to pay the higher price. Therefore, statement 1 is correct.
Statement 2: A tax is shifted backward to producers if the supply is relatively more inelastic than demand.
When the supply of a product is relatively more inelastic (not very responsive to price changes) than the demand, it means that producers are not able to increase the quantity supplied in response to an increase in price. In this case, if a tax is imposed on the product, the burden of the tax falls on the producers as they are unable to pass on the tax to the consumers by increasing the price. The producers have to bear the cost of the tax themselves, which reduces their profitability. Therefore, statement 2 is correct.
Conclusion: Both statements 1 and 2 are correct.
Explanation:
- When the demand for a product is inelastic and the supply is relatively more elastic, the burden of a tax is shifted forward to the consumers. The producers can increase the price of the product and pass on the tax burden to the consumers.
- On the other hand, when the supply is inelastic and the demand is relatively more elastic, the burden of a tax is shifted backward to the producers. The producers are unable to increase the quantity supplied in response to the tax and have to bear the cost of the tax themselves.
Therefore, both statements 1 and 2 are correct as they explain the situations in which the tax burden can be shifted to either the consumers or the producers based on the elasticity of demand and supply.
When the demand for a product is inelastic (not very responsive to price changes), it means that consumers are willing to pay a higher price for the product regardless of the tax. In this case, if a tax is imposed on the product, the producers can pass on the burden of the tax to the consumers by increasing the price. This is because consumers are not very sensitive to price changes and are willing to pay the higher price. Therefore, statement 1 is correct.
Statement 2: A tax is shifted backward to producers if the supply is relatively more inelastic than demand.
When the supply of a product is relatively more inelastic (not very responsive to price changes) than the demand, it means that producers are not able to increase the quantity supplied in response to an increase in price. In this case, if a tax is imposed on the product, the burden of the tax falls on the producers as they are unable to pass on the tax to the consumers by increasing the price. The producers have to bear the cost of the tax themselves, which reduces their profitability. Therefore, statement 2 is correct.
Conclusion: Both statements 1 and 2 are correct.
Explanation:
- When the demand for a product is inelastic and the supply is relatively more elastic, the burden of a tax is shifted forward to the consumers. The producers can increase the price of the product and pass on the tax burden to the consumers.
- On the other hand, when the supply is inelastic and the demand is relatively more elastic, the burden of a tax is shifted backward to the producers. The producers are unable to increase the quantity supplied in response to the tax and have to bear the cost of the tax themselves.
Therefore, both statements 1 and 2 are correct as they explain the situations in which the tax burden can be shifted to either the consumers or the producers based on the elasticity of demand and supply.
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Consider the following statements about impact of tax:1. A tax is shifted forward to consumers if the demand is inelastic relative to supply.2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand.Q. Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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