Suppose the Government Imposes an 8 Percent Sales Tax on Clothing

question 25

Multiple Choice

Suppose the government imposes an 8 percent sales tax on clothing items and the tax is levied on sellers.Who pays for the tax in this situation? (Assume that the demand curve is downward sloping and that the supply curve is upward sloping.)

• A)The tax is borne entirely by the sellers.
• B)The sellers will pass on the entire sales tax to consumers and therefore the consumers bear the tax.
• C)The tax will be borne partly by consumers and partly by sellers.
• D)It is not possible to answer the question without information on price elasticities.

---

Definitions:

Coefficient

A numerical or constant value that multiplies a variable in a mathematical expression, often used in equations to represent the relationship between variables.

Price Elasticity of Demand

An indicator of the sensitivity of the demand for an item to adjustments in its pricing.

Perfectly Inelastic Demand

Product or resource demand in which price can be of any amount at a particular quantity of the product or resource that is demanded; when the quantity demanded does not respond to a change in price; graphs as a vertical demand curve.