Question

Suppose the government introduces a $4 per unit tax on the supply of automobile tires (suppliers are responsible for submitting the tax payment). The effect of the tax on the market price for tires will depend most directly upon:
labor union negotiations in the automobile manufacturing industry.
price elasticities of supply and demand.
the political affiliation of the tire sales association.
the level of demand for tires.

Answer 1

Answer:

The correct answer is: price elasticity of supply and demand.

Explanation:

The government introduces a $4 per unit tax on the supply of automobile tires. The tax is imposed on the suppliers. The effect of the imposition of tax will remain the same whether the incidence falls on the buyer or seller. The imposition of tax will lead to an increase in the price of the commodity.

The burden shared by the buyers and sellers depends on the elasticity of demand and supply. If demand is more elastic than the supply, the supplier will bear the greater burden and vice versa.