If the demand for good is more elastic and government levied a tax per unit of output, the price per unit for the firm would:

Correct Answer : C.

If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer and if the elasticity of demand is high then the greater portion of the tax will be absorbed by the seller. This is because goods with elastic demand cause a large decline in quantity demanded for a small increase in price. Therefore in order to stabilize sales, the seller absorbs more of the additional tax burden. For example if a product has elastic demand and has a price of Rs.1. Suppose Rs.0.50 tax is imposed on each unit of the product. Now the seller might drop the price of the product to Rs.0.70 so that, after adding in tax of Rs.0.50, the buyer pays a total of Rs.1.20. In this example, the buyer has paid Rs.0.20 of the Rs.0.50 tax (in the form of post-tax price) and the seller has paid the remaining Rs.0.30 (in the form of a lower pretax price).}