When the government levies a seller tax on a good whose market demand is perfectly inelastic (and the market supply curve of this good is upward sloping as usual): 1. the entire tax burden falls on to the sellers of this good and there is no deadweight loss. 2. the entire tax burden falls on to the buyers of this good and there is no deadweight loss. 3. the entire tax burden falls on to the sellers of this good and there is deadweight loss. 4. the entire tax burden falls on to the buyers of this good and there is deadweight loss. 5. None of the above choices is correct.
Added by Jacob U.
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Step 1: The market demand for the good is perfectly inelastic, meaning buyers will not change the quantity they buy regardless of price changes. Show more…
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(a) Suppose labour supply is completely inelastic. Show why there is no deadweight burden if wages are taxed. Who bears the incidence of the tax? (b) Now suppose labour supply is quite elastic. Show the area that is the deadweight burden of the tax. How much of the tax is ultimately borne by firms and how much by workers? (c) Refer to the graphs given below. In graph (i) the labour demand is elastic; in graph (ii) the labour demand is inelastic. In which graph does the tax burden fall to a greater extent on firms?
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