Question

(a) Study the statements given below and state whether demand will be elastic or inelastic citing reasons for your answer.

1. Demand for cigarettes by a habitual smoker. 

2. A consumer postpones the purchase of a refrigerator till the off-season sale.

(b) State two differences between a tax and a fee.

(c) In what type of tax, shifting of the tax burden is possible? Explain using an example. 

(d) What is meant by progressive tax? Give an example.

Answer 1

(a) 

1. Demand for cigarettes by a habitual smoker generally have inelastic demand because these will be consumed irrespective of price variations. These addictive commodities can also be called conventional necessities. 

2. If a consumer can postpone the purchase of a refrigerator till the off season sale its demand will be elastic.

(b) Difference between a tax and a fee:

Fee	Tax
Fee is a payment paid by those who are benefitted from the special services rendered by the Government	Taxes are compulsory contributions, imposed by the Government on its citizen without any direct b
Fee is bilateral in nature.	Tax is unilateral in nature.

(c) Shifting of tax burden is possible in case of indirect tax. The tax is paid by some other person and the final incidence is borne by some other person e.g. excise duty and sale tax etc. 

(d) Progressive tax: A tax is called progressive when the rate of taxation increases as the tax payer’s income increases. 

Example: Income tax