Multiple choice

Tax is added to price when

  1. demand is perfectly elastic

  2. demand is highly inelastic

  3. supply is highly elastic

  4. supply is perfectly elastic

Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When demand is highly inelastic (consumers are relatively unresponsive to price changes), sellers can pass the tax burden onto buyers by increasing prices. If demand were elastic, consumers would reduce purchases significantly in response to price increases, making it difficult to add taxes to prices. This is why 'sin taxes' on addictive goods (with inelastic demand) are effective.