Tax Incidence on Inelastic Demand

Steps:

• A specific tax shifts the supply curve upward by the tax amount, creating a wedge between what buyers pay and sellers receive.
• The new equilibrium quantity decreases, and price to buyers rises while price to sellers falls.
• Tax incidence is determined by relative elasticities: the less elastic side bears more of the burden.
• If demand is relatively inelastic (steeper curve) compared to supply, producers absorb most of the tax.

Why A is correct:

• Tax incidence theorem states that the burden falls more heavily on the party with the less elastic curve; here, inelastic demand means producers bear most via lower net price.

Why the others are wrong:

• B: Taxes shift supply, not demand; no parallel demand curve forms.
• C: Price rises by less than the full tax due to shared incidence.
• D: Quantity fall depends on elasticities, not direct proportionality to tax rate.

Final answer: A