When demand for a product is price inelastic, the following can happen
When demand for a product is price inelastic, the following can happen
- A) consumers suffer the entire increase in tax on the product
- B) producer suffers the entire increase in tax on the product
- C) producer suffers larger proportion of the increase in tax on the product
- D) consumers suffer larger proportion of the increase in tax on the product
Correct Answer: D) consumers suffer larger proportion of the increase in tax on the product
Explanation
This question is asking what happens when the demand for a product is price inelastic and there is an increase in tax on the product. There are four options to choose from. Option A states that consumers will suffer the entire increase in tax on the product. Option B states that producers will suffer the entire increase in tax on the product. Option C states that producers will suffer a larger proportion of the increase in tax on the product. Option D (which is the correct answer) states that consumers will suffer a larger proportion of the increase in tax on the product when demand is price inelastic.
Price elasticity of demand refers to the degree of responsiveness of the quantity of a product demanded to a change in its price. When demand for a product is price inelastic, it means that a change in its price results in a relatively smaller change in the quantity demanded. In other words, the demand is not very sensitive to the price change.
When there is an increase in tax on a product, the price of the product increases. If the demand for the product is price inelastic, consumers will continue to buy the product despite the increase in price. This means that consumers will bear a larger proportion of the increase in tax on the product. On the other hand, producers will not be significantly affected as their sales will not decrease significantly. This is why Option D is the correct answer.
In summary, when the demand for a product is price inelastic and there is an increase in tax on the product, consumers will bear a larger proportion of the increase in tax. Producers will not be significantly affected as their sales will not decrease significantly.