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The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both...

The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.

Refer to Scenario. The equilibrium quantity will

a.

decrease in both markets such that the size of the change in equilibrium quantity will be smaller in the aged cheddar cheese market than in the bread market.
b.

increase in the aged cheddar cheese market and a decrease in the bread market such that the size of the change in equilibrium quantity will be smaller in the aged cheddar cheese market than in the bread market.
c.

decrease in the aged cheddar cheese market and increase in the bread market such that the size of the change in equilibrium quantity will be larger in the aged cheddar cheese market than in the bread market.
d.

increase in both markets such that the size of the change in equilibrium quantity will be greater in the aged cheddar cheese market than in the bread market.
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Answer #1

Here, option (b) is the correct answer

In the given case, it is said that the supply of aged chedar cheese is inelastic and that of the bread is elastic. This means that in accordance with the change in the demand, the supply would be affected the least in case of the cheese whereas even a small change in the demand would make considerable changes in the supply in case of bread. In the given case, it is said that due to a rise in the income tax, the demand for the goods have been decreased by 10% for both the goods. But it is also given that the supply of cheese is inelastic. Thus, it would mean that the supply would be affected the least in case of cheese rather than that of bread since the cheese is more inelastic than that of the bread.

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