Question

The demand for Carlo Rossi wine is relatively elastic since there are many other wines available to choose from. If the government decides to tax just this specific brand of wine, which of the following do you think will occur?
A. The majority of the tax will be paid by the producer
B. All of the tax will be passed on to the consumer
C. All of the tax will paid by by the producer
D. The majority of the tax will be paid by the consumer

Answer 1

Answer:

A. The majority of the tax will be paid by the producer

Explanation:

Elasticity of demand measures the rate of change in quantity demanded with changes in price.

When demand is relatively elastic it means that small changes in prices causes large change in quantity supplied.

So a small price increase will cause demand to drop by a large amount and vice versa.

In the given scenario Carlo Rossi wine has a relatively elastic demand coupled with other wine brands in the market. So an increase in price will cause demand to fall.

If the company is taxed by the government the only option they have is to bear majority of the tax