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CA Foundation · Business Economics · Price Determination in Different Markets

Under monopoly, if the government imposes a tax of ₹10 per unit sold, who bears the primary burden of the tax depends on which of the following?

The burden of a per-unit tax in a monopoly depends on the elasticity of demand. Inelastic demand allows the monopolist to pass most of the tax to consumers through price increases, while elastic demand forces the monopolist to absorb more of the tax burden itself.

  1. AThe elasticity of demand; the less elastic the demand, the more consumers bear the burdenCorrect
  2. BThe size of the firm; larger monopolies pass taxes entirely to consumers
  3. CThe price level; higher priced goods allow the monopoly to absorb taxes more easily
  4. DThe government's intention; if stated in the law, the burden is fixed between firm and consumer

Explanation

Tax incidence depends on price elasticity of demand. When demand is inelastic (consumers are not price-sensitive), the monopoly can raise price significantly without losing much quantity, shifting the tax burden to consumers. When demand is elastic, the firm must absorb more of the tax burden because raising prices causes substantial quantity loss. The size of the firm (option 2) does not determine tax incidence. Option 3 confuses absolute price with elasticity. Option 4 ignores that economic incidence (actual burden) differs from statutory incidence (legal assignment).

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