Question

An excise tax of $2 is placed on a jar of Honey. Honey producers end up bearing only $0.40 of the tax. The demand curve for honey is:a. elasticb. unitary elasticc. inelasticd. income elastic

Answer 1

Answer:

The correct answer is option c.

Explanation:

If the demand for a product is elastic the tax burden will be borne by the producer. This is because elastic demand means that an increase in the price will lead to a more than proportionate reduction in the quantity demanded. So with the imposition of a tax, the sellers will not increase the price as it is likely to reduce demand.

If the demand is inelastic, it means that an increase in price will lead to less than a proportionate decrease in the demand. In this situation, after the imposition of tax, the tax burden can be shared between producer and buyer.