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In which if the following scenarios will consumers pay a higher share of the tax? (1)...

In which if the following scenarios will consumers pay a higher share of the tax? (1) If a tax is placed on Frosted Flakes or (2) if a tax is placed on all breakfast cereals. Explain.

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Answer #1

Ans: if a tax is placed on all breakfast cereals.

Explanation:

Frosted Flakes has more substitutes available. When tax is imposed on Frosted Flakes, the price will increase. So, consumer will switch over to other substitutes of Frosted Flakes. But breakfast cereals has no substitutes. So, the demand for breakfast cereals is inelastic. So, even if price increases due to imposition of tax, people will purchase. So, consumers will pay a higher share of the tax.

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