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consider a $5 tax on insulin, a critical medicine for diabetics, and a $5 tax on...

consider a $5 tax on insulin, a critical medicine for diabetics, and a $5 tax on perfume. Both products sell for about $50, and about one million units of each are purchased. Which of the following best describes the impact of these two taxes?

the consumer price of insulin would rise less than the consume price of perfume

the consumer price for both goods would fall

the consumer price of both goods would rise by the same amount

the consumer price of insulin would rise more than the consumer price of perfume

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Answer #1

Answer : The answer is option D : "the consumer price of insulin would rise more than the consumer price of perfume".

Insulin is a critical medicine for diabetics patients. This means that insulin is a necessary good for diabetics patients. Hence the demand for insulin is inelastic. But the demand for perfume is elastic because it is not a necessary product. For inelastic demand if tax is imposed then consumers bear more tax burden while for elastic demand suppliers bear more tax burden. As here the demand for insulin is inelastic hence "the consumer price for insulin will rise more then the consumer price of perfume". For this reason except option D other options are not correct. Therefore, option D is the correct answer.

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