Question

Scenario 5-2

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 percent.

Refer to Scenario 5-2. The change in equilibrium quantity will be

a. unknown without more information.

b. greater in the aged cheddar cheese market than in the bread market.

c. greater in the bread market than in the aged cheddar cheese market.

d. the same in the aged cheddar cheese and bread markets.

Answer 1

C. Greater in the bread market than in the aged cheddar cheese market.

Explanation:

Since the supply of aged cheese is inelastic and the supply of bread is elastic where both the goods are considered normal by majority of consumers,when a large income tax increase, decreases the demand for both goods by 10 percent,the change in equilibrium quantity will be greater in bread market than in the aged cheese market because supply of bread is elastic and the supply of cheddar cheese is inelastic.The supply of bread is more elastic and therefore tax burden is beared by the buyers,supply curve shifts to the left and thus resulting in greater change in equilibrium quantity in the bread market than cheddar cheese market.