Question

Suppose the elasticity of demand for medicine is very inelastic and the elasticity of supply for medicine equals 1. A tax on the sale of medicine will:

		burden sellers and buyers relatively equally
		burden sellers and their workers more than consumers
		burden consumers more than sellers and their workers
		not burden consumers or sellers and their workers

Answer 1

As we know, when the supply is more elastic than the demand that implies that the burden of the tax will fall on the consumers more than the sellers and it implies that consumers will pay larger portion of the tax as compare to the sellers, therefore, we can say that a tax on the sale of medicine will burden consumers more than sellers and their workers. When the demand is very inelastic, it gives signal to the sellers that if they are going to change the price of the medicine then the quantity demanded of the medicine is not going to change by more than the change in price, therefore, there is an incentive for the sellers to increase the price of medicine by passing a larger portion of the tax to the consumers.