Suppose that an excise tax of $1 is levied on the sale of a bottle of fruit juice. Most of this tax will be borne by the seller rather than the buyer if the price elasticity of demand for fruit juice equals
A) 0.1
B) 0.3
C) 0.6
D) 1.9

Question

Quizplus · Accepted Answer

When the price elasticity of demand is high (greater than 1, in this case 1.9), it means consumers are very responsive to price changes. Therefore, if the price of fruit juice increases due to the tax, consumers will significantly reduce their quantity demanded. Sellers, wanting to maintain their sales volume, will absorb most of the tax burden rather than passing it on to consumers.

Suppose That an Excise Tax of $1 Is Levied on the Sale