Asked by Mobolaji Ajewole on May 10, 2024
Verified
If the supply of a product is perfectly elastic and demand is downsloping, an excise tax of $2 per unit will increase price by
A) more than $2.
B) less than $2.
C) $2 and increase equilibrium output.
D) $2 and reduce equilibrium output.
Perfectly Elastic
Describes a situation in which the quantity demanded or supplied reacts to the smallest change in price with an infinite amount of change in quantity.
Excise Tax
A targeted tax levied on the sale of specific goods and services, such as alcohol and tobacco, often used to discourage consumption.
Equilibrium Output
The level of production in a market where the quantity supplied equals the quantity demanded, leading to a state of balance without excess supply or demand.
- Understand the principle of tax incidence and its differential impact on producers and consumers based on the elasticity of supply and demand.
Verified Answer
IB
Ishiyihmie BurrellMay 16, 2024
Final Answer :
D
Explanation :
When supply is perfectly elastic, it can respond infinitely at the current price level, meaning suppliers will absorb the cost of the tax without changing the price. However, because demand is downsloping, the imposition of a $2 excise tax will be fully reflected in the price paid by consumers, leading to a decrease in equilibrium output as the market adjusts to the new price level.
Learning Objectives
- Understand the principle of tax incidence and its differential impact on producers and consumers based on the elasticity of supply and demand.