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Pancyprian Economics practice questions

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Question 1Basic economic concepts and the economic problem

In economics, what does the term 'scarcity' mean?

  1. Resources are limited relative to the unlimited wants of people Correct answer.
  2. A good is temporarily out of stock in a shop
  3. Some people are poorer than others in the same country
  4. Total production in an economy has fallen for two quarters

Explanation

Scarcity is the fundamental economic problem: productive resources are finite while human wants are effectively unlimited, so choices must be made. It applies to every society, rich or poor, and is not the same as poverty or a temporary shortage.

Question 2Basic economic concepts and the economic problem

A student has €20 and must choose between a cinema ticket costing €15 and a concert ticket costing €20. What is the opportunity cost of buying the concert ticket?

  1. The concert ticket itself
  2. The cinema ticket she gives up Correct answer.
  3. €20 in cash
  4. Nothing, because she wanted the concert most

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. By spending the €20 on the concert, she gives up the cinema ticket, which is the best alternative she could otherwise have chosen.

Question 3Basic economic concepts and the economic problem

Which statement best describes the economic problem of 'what to produce'?

  1. Deciding whether prices should be set by firms or by government
  2. Deciding how income and output are shared among members of society
  3. Deciding which combination of goods and services should be produced with limited resources Correct answer.
  4. Deciding which production methods use the least labour per unit

Explanation

Every economy must answer three basic questions, and 'what to produce' concerns the mix of goods and services, such as capital versus consumer goods, that limited resources will be devoted to. The other questions of 'how' and 'for whom' concern technique and distribution.

Question 4Basic economic concepts and the economic problem

Which of the following is classified as a factor of production called 'capital'?

  1. A worker's skill acquired through training
  2. A delivery van used by a bakery Correct answer.
  3. Iron ore still in the ground
  4. Money saved in a bank account

Explanation

In economics, capital means man-made goods used to produce other goods and services, such as machinery, tools and vehicles. A delivery van fits this definition because it is produced and then used in the production process.

Question 5Basic economic concepts and the economic problem

A production possibility frontier shows the maximum output of two goods an economy can produce. What does a point inside the frontier represent?

  1. A combination that requires an improvement in technology
  2. An unattainable combination given current resources
  3. A combination where the opportunity cost is zero
  4. A combination using resources inefficiently or with unemployment Correct answer.

Explanation

Points on the curve are productively efficient, while points inside it show that some resources are idle or used inefficiently, so more of one good could be produced without giving up the other. Points outside the frontier are unattainable with current resources and technology.

Question 6Basic economic concepts and the economic problem

A firm uses land, labour and capital to produce bread. Which combination correctly matches each payment to its factor of production?

  1. Interest to land, rent to labour, wages to capital
  2. Rent to labour, wages to land, interest to capital
  3. Rent to capital, wages to land, profit to labour
  4. Rent to land, wages to labour, interest to capital Correct answer.

Explanation

Each factor of production earns a characteristic reward: land earns rent, labour earns wages, capital earns interest and enterprise earns profit. The second option follows this standard mapping correctly.

Question 7Basic economic concepts and the economic problem

A country can produce either 100 units of food or 50 units of clothing with its resources, and the frontier is a straight line. What is the opportunity cost of one unit of clothing?

  1. 50 units of food
  2. 0.5 units of food
  3. 2 units of food Correct answer.
  4. 1 unit of food

Explanation

With a straight-line frontier the trade-off is constant: producing 50 clothing means giving up 100 food, so each unit of clothing costs 100/50 = 2 units of food. The opportunity cost of clothing is therefore measured in the food sacrificed.

Question 8Basic economic concepts and the economic problem

Which of these is an example of a positive economic statement rather than a normative one?

  1. The government ought to raise the minimum wage to reduce poverty
  2. Income inequality is the most important problem facing society
  3. An increase in the minimum wage will raise the incomes of low-paid workers Correct answer.
  4. Fairness requires that all workers earn a living wage

Explanation

Positive statements are factual claims about how the economy works that can be tested against evidence, such as the predicted effect of a minimum wage on incomes. Normative statements express value judgements about what should be and cannot be settled by data alone.

Question 9Basic economic concepts and the economic problem

In a free market economy, the three basic economic questions are mainly resolved by:

  1. The price mechanism operating through supply and demand Correct answer.
  2. Traditions passed down between generations
  3. Voting by citizens on production targets
  4. Decisions of a central planning authority

Explanation

In a free market economy, resources are allocated through the price mechanism: prices signal scarcity and provide incentives for producers and consumers. No central planner decides the output mix, although real economies are usually mixed.

Question 10Basic economic concepts and the economic problem

A government decides to build a new motorway using land that was previously a public park. Which statement identifies the opportunity cost of this decision?

  1. The recreational value of the park that is lost Correct answer.
  2. The increase in land prices near the new road
  3. The tolls that drivers will pay to use the motorway
  4. The construction workers' wages and the cost of asphalt

Explanation

Opportunity cost is the next best alternative forgone, which here is the park and the recreation it provided. The wages and materials are the financial costs of the chosen project, not the alternative sacrificed.

Question 11Basic economic concepts and the economic problem

Why does the production possibility frontier typically have a bowed-out (concave) shape?

  1. Because opportunity cost rises as more of one good is produced Correct answer.
  2. Because an economy always operates on the frontier
  3. Because technology improves continuously over time
  4. Because resources are equally suited to producing both goods

Explanation

As production shifts towards one good, resources less suited to it must be used, so increasing amounts of the other good are given up. This increasing opportunity cost produces the concave shape of the frontier.

Question 12Basic economic concepts and the economic problem

Which best explains why specialisation and division of labour raise output?

  1. Firms can avoid paying wages to unskilled workers
  2. Each worker produces the whole product from start to finish, which avoids coordination
  3. Total working hours in the economy are automatically increased
  4. Workers repeat one task, so they become more skilled and time is saved moving between tasks Correct answer.

Explanation

Specialisation allows workers to concentrate on a narrow task, improving skill and speed while avoiding the time lost switching between jobs. It also encourages the use of machinery, but it depends on trade and coordination.

Question 13Basic economic concepts and the economic problem

An economy's production possibility frontier shifts outward. Which change could explain this?

  1. An increase in the number of workers unemployed
  2. A decision to produce more consumer goods and fewer capital goods
  3. A rise in the price of the goods being produced
  4. A discovery of new mineral deposits and better machinery Correct answer.

Explanation

An outward shift of the frontier means the economy's productive capacity has grown, which results from more or better resources or improved technology. New mineral deposits and better machinery both increase capacity.

Question 14Basic economic concepts and the economic problem

Which statement about the factor 'enterprise' is correct?

  1. It consists of man-made aids to production such as factories
  2. It refers to the natural resources used in production
  3. It is the human effort, physical and mental, used in production
  4. It organises the other factors and bears the risk of production Correct answer.

Explanation

Enterprise, or entrepreneurship, is the factor that combines land, labour and capital, takes decisions and bears the risk of loss. Its reward is profit, which may be negative if the business fails.

Question 15Basic economic concepts and the economic problem

A country moves from producing only food to producing only clothing along a concave production possibility frontier. What happens to the opportunity cost of clothing as more clothing is produced?

  1. It falls, because workers become more experienced
  2. It becomes zero once all food production stops
  3. It remains constant, because resources are fully employed
  4. It rises, because resources less suited to clothing must be transferred Correct answer.

Explanation

With a concave frontier, resources are not perfectly adaptable, so each additional unit of clothing requires giving up ever more food. The opportunity cost of clothing therefore rises as clothing output expands.

Question 16Basic economic concepts and the economic problem

Two economies each have straight-line production possibility frontiers. Economy A gives up 4 units of food per unit of clothing; economy B gives up 2 units of food per unit of clothing. What does this imply?

  1. Economy B has a comparative advantage in clothing Correct answer.
  2. Economy A has a comparative advantage in clothing
  3. Neither economy can gain from specialisation
  4. Economy A has an absolute advantage in clothing

Explanation

Comparative advantage depends on lower opportunity cost, and economy B sacrifices only 2 units of food per unit of clothing compared with 4 in economy A. Economy B is therefore the lower-cost producer of clothing and should specialise in it.

Question 17Basic economic concepts and the economic problem

Which statement about a mixed economy is most accurate?

  1. All resources are owned and allocated by private firms without government involvement
  2. Both private enterprise and government play a role in allocating resources Correct answer.
  3. All productive resources are owned by the state and allocated by planners
  4. Only traditional methods are used to decide what to produce

Explanation

A mixed economy combines market allocation with government provision and regulation, such as public goods, taxation and welfare. Most real economies, including EU member states, are mixed rather than purely market or purely command.

Question 18Basic economic concepts and the economic problem

A student argues that because water is essential for life it must be more valuable than diamonds, yet diamonds command a much higher price. Which concept best explains this apparent paradox?

  1. Opportunity cost, since water has no alternative uses
  2. Scarcity, since diamonds are essential for survival
  3. Specialisation, since water is produced by monopolies
  4. Marginal utility, since the price reflects the value of one additional unit rather than total usefulness Correct answer.

Explanation

The paradox of value is resolved by marginal utility: water is so abundant that the last unit consumed has low marginal value, while diamonds are scarce so their marginal unit has high value. Price reflects marginal, not total, utility.

Question 19Basic economic concepts and the economic problem

Which of the following best describes 'capital goods' as distinct from consumer goods?

  1. Goods provided free of charge by the government
  2. Goods that are exported to other countries
  3. Goods bought by households for final consumption
  4. Goods used to produce other goods and services Correct answer.

Explanation

Capital goods are produced means of production, such as machinery and equipment, that are used to make other goods rather than being consumed directly. Consumer goods, by contrast, satisfy wants directly.

Question 20Basic economic concepts and the economic problem

An economy is currently operating at a point inside its production possibility frontier. Which policy is most likely to move it onto the frontier in the short run?

  1. Investing in research to develop new technology
  2. Increasing the retirement age of all workers
  3. Discovering new natural resources
  4. Reducing unemployment and using idle factories Correct answer.

Explanation

A point inside the frontier signals unemployed or inefficiently used resources, so putting idle workers and factories back to work moves the economy onto the existing frontier. The other options expand capacity and shift the frontier outward over time.

Question 21Demand, supply and market equilibrium

In the market for oranges, which of the following would cause a movement along the demand curve rather than a shift of the demand curve?

  1. An increase in consumers' incomes
  2. A fall in the price of oranges Correct answer.
  3. A new health report praising orange consumption
  4. A rise in the price of tangerines, a substitute

Explanation

A change in the good's own price changes quantity demanded and is shown as a movement along a given demand curve. The other events change demand at every price, shifting the whole curve.

Question 22Demand, supply and market equilibrium

The supply curve for a product slopes upward because, as output rises,

  1. the extra cost of producing each additional unit generally rises Correct answer.
  2. technology always improves with larger output
  3. firms can charge higher prices for each unit
  4. consumers are willing to pay less for additional units

Explanation

An upward-sloping supply curve reflects increasing marginal cost: producing more requires attracting resources away from other uses, raising unit costs. Firms therefore need a higher price to supply larger quantities.

Question 23Demand, supply and market equilibrium

A market is in equilibrium when, at the prevailing price,

  1. quantity demanded exceeds quantity supplied
  2. quantity demanded equals quantity supplied Correct answer.
  3. the government has fixed a maximum price
  4. quantity supplied exceeds quantity demanded

Explanation

Equilibrium occurs where the quantity buyers wish to purchase equals the quantity sellers wish to sell, so there is no pressure for the price to change. Any mismatch creates a shortage or surplus that moves price.

Question 24Demand, supply and market equilibrium

If the price of a good is set above the equilibrium price, the immediate result in the market is

  1. no change, because the market always clears
  2. a shortage, because demand rises
  3. a surplus, because demand falls to zero
  4. a surplus, because quantity supplied exceeds quantity demanded Correct answer.

Explanation

At a price above equilibrium, the quantity supplied is greater than the quantity demanded, creating excess supply (a surplus). Sellers then tend to cut prices to clear unsold stock.

Question 25Demand, supply and market equilibrium

Which of the following is most likely to shift the supply curve of bread to the left?

  1. A rise in consumers' incomes
  2. A decrease in the price of bread
  3. An increase in the price of flour Correct answer.
  4. A fall in the wage paid to bakery workers

Explanation

Flour is an input in bread production, so a higher input price raises costs and reduces supply at every price, shifting supply left. The other events affect costs in the opposite direction or affect demand or quantity supplied.

Question 26Demand, supply and market equilibrium

The demand for a good is said to be price elastic when

  1. the percentage change in quantity demanded is smaller than the percentage change in price
  2. the good is a necessity with few substitutes
  3. quantity demanded does not respond to price at all
  4. the percentage change in quantity demanded is greater than the percentage change in price Correct answer.

Explanation

Price elasticity of demand compares the proportional change in quantity demanded with the proportional change in price. When quantity responds proportionally more than price, elasticity exceeds one and demand is elastic.

Question 27Demand, supply and market equilibrium

A price ceiling set below the equilibrium price of a rented housing market will most likely lead to

  1. persistent excess demand for rental housing Correct answer.
  2. equilibrium being restored automatically
  3. an increase in the quantity of housing supplied
  4. a surplus of rental properties

Explanation

A binding price ceiling holds price below equilibrium, so quantity demanded exceeds quantity supplied. The result is a shortage, often appearing as queues, waiting lists or black markets.

Question 28Demand, supply and market equilibrium

When a market is in equilibrium, the total surplus (consumer surplus plus producer surplus) is

  1. equal to the revenue collected by the government
  2. reduced by every unit traded beyond the equilibrium quantity
  3. zero, because every buyer pays exactly what they value
  4. maximised, because all mutually beneficial trades occur Correct answer.

Explanation

At equilibrium, every unit for which willingness to pay exceeds marginal cost is traded, so the sum of consumer and producer surplus is at its maximum. Trades beyond equilibrium would cost more to produce than buyers value them.

Question 29Demand, supply and market equilibrium

A technological improvement lowers the cost of producing solar panels. In the solar panel market, this change will

  1. shift demand right, raising both equilibrium price and quantity
  2. leave equilibrium unchanged because only demand matters
  3. shift supply left, raising equilibrium price and lowering quantity
  4. shift supply right, lowering equilibrium price and raising equilibrium quantity Correct answer.

Explanation

Lower production costs increase supply at every price, shifting the supply curve right. Moving along a stable demand curve, the new equilibrium has a lower price and a larger quantity traded.

Question 30Demand, supply and market equilibrium

Consumers' incomes rise and buses are an inferior good. What happens in the market for bus travel?

  1. Demand shifts right and equilibrium price and quantity rise
  2. Demand is unchanged because bus travel is a necessity
  3. Supply shifts left and equilibrium price rises
  4. Demand shifts left and equilibrium price and quantity fall Correct answer.

Explanation

For an inferior good, demand falls when income rises because consumers switch to preferred alternatives. A leftward demand shift lowers both the equilibrium price and the equilibrium quantity.

Question 31Demand, supply and market equilibrium

The supply of a product falls while demand remains constant. Which statement about the new equilibrium is correct?

  1. Price rises and quantity traded rises
  2. Price rises and quantity traded falls Correct answer.
  3. Price falls and quantity traded rises
  4. Price falls and quantity traded falls

Explanation

A leftward supply shift moves the equilibrium up along the demand curve. The new equilibrium therefore has a higher price and a lower quantity exchanged.

Question 32Demand, supply and market equilibrium

Demand and supply both increase by the same amount. What can be concluded about the new equilibrium?

  1. Equilibrium price rises and quantity is unchanged
  2. Equilibrium quantity is unchanged and price falls
  3. Both equilibrium price and quantity fall
  4. Equilibrium quantity rises and the effect on price is indeterminate without more information Correct answer.

Explanation

Both shifts push quantity upward, so equilibrium quantity definitely rises. Their effects on price work in opposite directions, so the price change depends on the relative sizes of the shifts.

Question 33Demand, supply and market equilibrium

A firm lowers the price of its product from €10 to €8 and finds that quantity demanded rises from 100 to 140 units. Using the simple percentage method, price elasticity of demand is approximately

  1. 0.5
  2. 2.0 Correct answer.
  3. 1.0
  4. 4.0

Explanation

Quantity rises by 40% (40/100) while price falls by 20% (2/10). Dividing the quantity change by the price change gives 40/20 = 2, so demand is elastic over this range.

Question 34Demand, supply and market equilibrium

Which characteristic would most likely make the demand for a product price inelastic?

  1. Many close substitutes are available
  2. The product accounts for a large share of household income
  3. Buyers can easily postpone the purchase
  4. The product is a necessity with few substitutes Correct answer.

Explanation

When a good is a necessity and substitutes are scarce, consumers cannot easily reduce consumption when price rises, so quantity responds little. This gives low price elasticity of demand.

Question 35Demand, supply and market equilibrium

A government imposes a tax on the producers of a good whose demand is very inelastic and whose supply is relatively elastic. The burden of the tax will fall

  1. equally on consumers and producers regardless of elasticities
  2. entirely on producers, because the tax is legally levied on them
  3. mostly on consumers, because they cannot easily reduce quantity demanded Correct answer.
  4. mostly on producers, because they pay the tax directly to the government

Explanation

Tax incidence depends on relative elasticities, not on who legally pays. The side of the market that is less able to adjust quantity bears more of the burden, so inelastic consumers bear most of the tax.

Question 36Demand, supply and market equilibrium

A minimum price (price floor) set above the equilibrium price in an agricultural market will

  1. create excess supply that may require government purchase or storage Correct answer.
  2. have no effect because markets always clear
  3. lower the price received by farmers
  4. create excess demand for the product

Explanation

A binding price floor holds price above equilibrium, so quantity supplied exceeds quantity demanded. The resulting surplus often forces governments to buy or store the excess.

Question 37Demand, supply and market equilibrium

Which event would shift the demand curve for coffee to the right?

  1. A fall in the price of coffee
  2. A rise in the price of tea, a substitute for coffee Correct answer.
  3. A fall in the wages of coffee pickers
  4. An improvement in coffee harvesting technology

Explanation

A rise in the price of a substitute makes coffee relatively more attractive, so consumers demand more coffee at every price. This shifts the demand curve rightward.

Question 38Demand, supply and market equilibrium

The market for a good is in equilibrium. Simultaneously, a rise in input costs reduces supply and a fall in consumer incomes (the good being normal) reduces demand. What is the certain outcome?

  1. Equilibrium price falls and quantity rises
  2. Equilibrium price rises; the quantity effect is indeterminate
  3. Both price and quantity remain unchanged
  4. Equilibrium quantity falls; the price effect is indeterminate Correct answer.

Explanation

Both a supply decrease and a demand decrease reduce the quantity traded, so quantity definitely falls. They push price in opposite directions, so the price outcome depends on the relative magnitudes of the shifts.

Question 39Demand, supply and market equilibrium

A firm's supply curve in a perfectly competitive market is best described as

  1. a vertical line at the firm's maximum capacity
  2. the portion of its marginal cost curve above average variable cost Correct answer.
  3. its entire average total cost curve
  4. the horizontal sum of all consumers' demand curves

Explanation

A competitive firm supplies where price equals marginal cost, provided price covers average variable cost. The supply curve is therefore the marginal cost curve above the shutdown point.

Question 40Demand, supply and market equilibrium

When the price of a good rises and total revenue earned by sellers falls, this indicates that, over that price range, demand is

  1. price elastic Correct answer.
  2. price inelastic
  3. unit elastic at every point
  4. perfectly inelastic

Explanation

If demand is elastic, a price rise causes a proportionally larger fall in quantity demanded, so total revenue falls. The revenue test therefore points to elastic demand.

Question 41Demand, supply and market equilibrium

An increase in the number of firms producing a good, other things equal, will

  1. shift market demand right and raise the equilibrium price
  2. shift market supply right and lower the equilibrium price Correct answer.
  3. shift market supply left and raise the equilibrium price
  4. leave market supply unchanged because each firm is small

Explanation

More producers mean a greater quantity supplied at every price, shifting market supply right. Moving along the demand curve, equilibrium price falls and quantity traded rises.

Question 42Demand, supply and market equilibrium

A consumer surplus for an individual buyer is measured as

  1. the difference between what the buyer is willing to pay and the price actually paid Correct answer.
  2. the price paid minus the marginal cost of production
  3. the revenue received by the seller from that buyer
  4. the total amount the buyer spends on the good

Explanation

Consumer surplus is the benefit a buyer gains because willingness to pay exceeds the market price. Graphically it is the area below the demand curve and above the price.

Question 43Demand, supply and market equilibrium

A good has a price elasticity of demand of 0.4 and a price elasticity of supply of 1.6. If a tax is placed on the good, which outcome is expected?

  1. Producers bear most of the tax because supply is more elastic than demand
  2. The tax burden is split equally because the elasticities sum to 2.0
  3. Consumers bear most of the tax because demand is less elastic than supply Correct answer.
  4. No tax revenue is collected because demand is inelastic

Explanation

The tax burden falls more heavily on the side of the market that is less responsive to price. With demand much less elastic than supply, consumers absorb the larger share of the tax.

Question 44Demand, supply and market equilibrium

The demand curve for a good shifts right while the supply curve is perfectly vertical. What happens to equilibrium?

  1. Both price and quantity are unchanged
  2. Price rises and quantity is unchanged Correct answer.
  3. Price is unchanged and quantity rises
  4. Both price and quantity rise

Explanation

With a vertical supply curve, quantity supplied is fixed regardless of price. A rightward demand shift therefore only raises the price, with quantity set entirely by the fixed supply.

Question 45Demand, supply and market equilibrium

A market is initially in equilibrium. The government grants a subsidy to producers equal to €2 per unit. Which statement best describes the short-run result?

  1. Supply shifts right, the price paid by consumers falls and the quantity traded rises Correct answer.
  2. Supply shifts left, the price paid by consumers rises and quantity falls
  3. Demand shifts right, the price paid by consumers rises and quantity rises
  4. The subsidy has no effect because it is paid to producers rather than consumers

Explanation

A per-unit subsidy lowers producers' effective costs, shifting supply right. The new equilibrium has a lower consumer price and a larger quantity, while producers receive the consumer price plus the subsidy.

Question 46Demand, supply and market equilibrium

A movement along a given demand curve for a good, from one point to another, is caused by a change in which of the following?

  1. The price of the good itself Correct answer.
  2. The price of a substitute good
  3. Consumers' tastes and preferences
  4. Consumers' incomes

Explanation

A change in the good's own price alters quantity demanded and is shown as a movement along a fixed demand curve. The other listed factors are demand shifters: they move the whole curve to a new position rather than tracing a movement along it.

Question 47Demand, supply and market equilibrium

In the market for a normal good, the equilibrium price is €30 and the equilibrium quantity is 500 units. The government then sets a price ceiling of €40. What is the effect on this market?

  1. The ceiling has no binding effect, so price and quantity stay at €30 and 500 units Correct answer.
  2. Quantity supplied falls to zero
  3. A surplus of 500 units develops
  4. A shortage develops because quantity demanded exceeds quantity supplied

Explanation

A price ceiling only changes market outcomes when it is set below the equilibrium price. At €40 the ceiling is above the €30 equilibrium, so the market price remains at equilibrium and the ceiling is non-binding.

Question 48Demand, supply and market equilibrium

The price of a good falls from €20 to €16, and quantity supplied falls from 300 to 240 units. Using the midpoint (arc) formula, the price elasticity of supply is closest to which value?

  1. 1.00
  2. 0.67
  3. 3.00 Correct answer.
  4. 0.33

Explanation

The midpoint formula divides the percentage change in quantity by the percentage change in price. Quantity changes by 60 on a base of 270 (about 22.2%) and price changes by 4 on a base of 18 (about 22.2%), giving an elasticity of 3.00, so supply is elastic over this range.

Question 49Demand, supply and market equilibrium

A government introduces a subsidy paid to producers of a good. Demand and supply have their usual slopes, and the market is competitive. Which statement best describes the resulting market outcome?

  1. The supply curve shifts down by the full subsidy, and the price paid by consumers falls by less than the subsidy Correct answer.
  2. The supply curve shifts up, and the equilibrium quantity falls
  3. The supply curve shifts down by the full subsidy, and the price paid by consumers falls by exactly the full subsidy
  4. The demand curve shifts up, and producers receive exactly the old equilibrium price

Explanation

A per-unit subsidy to producers lowers marginal cost, shifting supply downward by the subsidy amount. Because the new equilibrium lies on a downward-sloping demand curve, consumers gain only part of the subsidy as a lower price, with the remainder raising producers' receipts.

Question 50Demand, supply and market equilibrium

In a competitive market the demand curve is downward sloping and the supply curve is upward sloping. The government imposes a per-unit tax on sellers. Which statement about the tax burden is correct?

  1. The burden is shared equally whenever the tax is collected from sellers rather than buyers
  2. The burden is shared, and the side of the market that is less elastic bears the larger share Correct answer.
  3. Sellers bear the entire tax because the tax is legally collected from them
  4. Buyers bear the entire tax because demand slopes downward

Explanation

The statutory incidence of a tax does not determine who bears its economic burden. The burden is divided according to relative elasticities, with the less elastic side of the market absorbing the larger share because it has fewer ways to adjust quantity.