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1. Use a diagram to explain how the incidence (burden) of a tax is shared among producers and consumers when an ad valorem indirect tax is placed on a good which has relatively inelastic demand. An indirect tax is a tax set on goods or services such as value added tax (VAT) in the UK. However, such can be divided in several types of taxes. One, for instance, is an ad valorem tax; tax added as a percentage of the value of the good or service. When referring to the incidence of a tax, it is referred to the tax burden on the tax payer. Such taxes are paid by consumers and producers, depending not only on its prices but, consequently, depending on the demand and supply of that certain good. When an ad valorem tax is placed on a good which has a relatively inelastic demand (goods such as alcohol which demand...

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