Question

Which of the following best describes the effects of a per unit purchased tax on producers when the demand curve and the supply curve are both neither perfectly elastic nor perfectly inelastic?

a) Price to consumers increases; price received by producers increases; quantity bought and sold increases

b) Price to consumers increases; price received by producers decreases; quantity bought and sold increases

c) Price to consumers decreases; price received by producers increases; quantity bought and sold increases

d) Price to consumers increases; price received by producers decreases; quantity bought and sold decreases

Answer 1

d) Price to consumers increases; price received by producers decreases; quantity bought and sold decreases

Explanation: Since the demand curve and the supply curve are both neither perfectly elastic nor perfectly inelastic, the incidence of tax will fall on both the consumers and the producers. Therefore, price to consumers will increase and the price received by producers will decrease. Also, the increased price to consumers will result in a fall in demand. Moreover, decreased price to producers will result in fall in supply. So, the quantity bought and sold will go down.