Asked by Chloe Guida on Jul 17, 2024
Verified
Assume the supply curve for product X is perfectly elastic and that government imposes a $2-per-unit excise tax.We can conclude that the resulting:
A) increase in output will be greater the less elastic the demand curve.
B) decrease in output will be greater the less elastic the demand curve.
C) decrease in output will be greater the more elastic the demand curve.
D) increase in output will be greater the more elastic the demand curve.
Perfectly Elastic
A situation in economics where the quantity demanded or supplied responds infinitely to changes in price.
Excise Tax
A tax levied on specific goods, services, or transactions, often included in the price of products like tobacco, alcohol, and gasoline.
- Appreciate the role of elasticity in evaluating the impact of taxation on market prices and quantities.
Verified Answer
KO
Krystal OsegueraJul 17, 2024
Final Answer :
C
Explanation :
With a perfectly elastic supply curve, suppliers can easily shift the burden of the tax onto consumers by simply adjusting the price of the product upwards by the full amount of the tax, resulting in no change in output. The decrease in quantity demanded will be greater the more elastic the demand curve, as consumers will be more sensitive to the price increase and switch to substitute goods or reduce their overall consumption of the product. Therefore, option C is the correct choice.
Learning Objectives
- Appreciate the role of elasticity in evaluating the impact of taxation on market prices and quantities.