Chapter 9R, Problem 9MCQ

To determine

The conclusion of economists in the cigarette market if the government levied a tax of $0.50 on buying cigarettes where the price elasticity of demand is 1.2 and the price elasticity of supply is 0.7.

Explanation of Solution

As the price elasticity of demand (1.2) is more than the price elasticity of supply which is 0.7, therefore, the burden of taxes is highly falls on producers as compared to consumers because producers will bear most of the cost of this tax.

Here, the option e is correct, the burden of this tax falls more on producers than consumers.

Economics Concept Introduction

Introduction:

A tax burden involves the payment that a taxpayer pays to the government and an economic loss that a taxpayer bears in reaction to taxes.