Adams Corporation manufactures appliances. This year, the government increased the corporate tax rate by 5 percent. Adams responded by raising its prices. Customer demand remained steady; therefore, Adams's before-tax profits increased and after-tax profits remained constant.
a. Who bears the incidence of the increase in Adams's corporate tax?
b. How would your answer change if Adams did not raise prices, resulting in a decline in its after-tax profits and a drop in the market price of its stock?