Question

24. When demand is infinitely elastic (ceteris paribus), and there is technological advance which shifts the supply curve, we should expect that in this market

a. none of the other answers are correct.

b. equilibrium quantity declines.

c. the supply curve moves leftward.

d. the new equilibrium price remains unchanged.

25. The burden of a sales tax will fall most heavily upon the consumers when

a. demand has unitary elasticity.

b. supply is more elastic.

c. demand is more elastic.

d. demand is more inelastic.

Answer 1

Q24
Answer
Option d

The demand is infinitely elastic means a small change in a price can change demand infinitely, as an increase in price decreases quantity demanded to zero and decrease in price increases quantity demanded to infinity so the demand curve is horizontal at a fixed price level.
The technological advancement increases supply and shifts the supply curve to the right, which increases the quantity from Q1 to Q2 in the graph, but the price will remain the same.

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Q25
Answer
Option b

The elasticity of demand measures changes in quantity because of a change in price in term of percentage or proportion.
The tax burden depends on the elasticities of demand and supply, as follows.
Tax Burden on Consumer =Es/(Ed+Es)
Tax Burden on Supplier =Ed/(Ed+Es)
Ed=elastictiy of demand
Es=elasticity of supply

If the elasticity of supply is higher than the elasticity of demand, then the tax burden on consumer is higher.

Example:
Es=6 and Ed=4
Es>Ed

Tax Burden on Consumer =6/(6+4)=0.6
Tax Burden on Supplier =4/(6+4)=0.4
It means $1 tax will be shared as $0.6 on consumer and $0.4 on producer.