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A $1-per-gallon tax on the sale of gasoline will raise the price by $1 per gallon if a
A $1-per-gallon tax on the sale of gasoline will raise the price by $1 per gallon if
a. the demand is perfectly elastic.
b. the demand is unit elastic.
c. the supply is perfectly elastic.
d. the supply is perfectly inelastic.
Expert Solution
The correct answer is c. the supply is perfectly elastic
This is because the elasticity level of demand and supply determines the tax burden in the market. If the buyers have fluctuating demand, then the tax burden falls on the supplier. This is because any increase in price leads to reduce the demand. Similarly, if the supply is more elastic than demand any fluctuation in taxes would lead to impact the buyers only. This is because the sellers have the option to move to next option.
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