Indirect Tax and Inelastic Demand

Steps:

• An indirect tax shifts the supply curve left, increasing price and decreasing quantity demanded.
• Total consumer expenditure is price times quantity.
• If expenditure rises after the tax, the price increase outweighs the quantity decrease.
• This occurs only when price elasticity of demand is less than 1 (inelastic).

Why D is correct:

• Inelastic demand means quantity falls less than price rises, so total expenditure increases per the elasticity formula |PED| < 1.

Why the others are wrong:

• A: Elastic demand causes expenditure to decrease as quantity falls more than price rises.
• B: Inelastic demand causes expenditure to increase, not decrease.
• C: Elastic demand causes expenditure to decrease despite price increase.

Final answer: D