Suppose that the demand for soft drinks is price elastic and the supply is price

Question

Suppose that the demand for soft drinks is price elastic and the supply is price inelastic. If the government imposes a sales tax on soft drinks, which of the following will occur?a.) The tax will fall equally on both consumers and producers. b.) The tax will fall more on producers .c The tax will fall more on consumers. d.) The percentage increase in the price of soft drinks will be greater than the percent decrease in quantity demanded e.) the percent decrease in total revenue will be greater than the percent decrease in the quantity demanded.

Explanation / Answer

The correct answer is option C = The tax will fall more on consumers.

Here, the supply is inelastic and the demand is elastic. We should remember that:

1) Taxes increases the price of goods and decrease the quantity demanded.

2) Suppliers and consumers bear the burden of tax.

3) That group will face a greater tax burden whose elasticity is more, in this case it is the consumer.

Hope my solution solves your query.

Regards

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