contestada

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%.The equilibrium quantity will:The answer is decrease in both the aged cheddar cheese and bread markets. Why?

Respuesta :

Answer:

Aged Cheddar cheese & Bread prices fall because their has been a decrease in their demand.

Explanation:

Given : Aged Cheddar cheese & Bread having inelastic & elastic supply respectively ; Income tax increase decreases demand of both.

Income Tax is a direct tax whose incidence an impact lie on the same person & burden can't be shifted.

  • Increase in income Tax reduces the disposable income of consumers & as said - reduces demand of both the goods.
  • This tax burden can't be shared between sellers & buyers will not effect the supply side (unlike indirect tax - eg sales tax).

Elasticities of supply is just supply responsiveness to price change, is not relevant here.

So : Supply being same & decrease in demand (i.e leftwards shift in demand curve) creates Excess Supply at that price level, irrespective of supply elasticity. Excess supply creates competition among sellers and reduces the price.

Otras preguntas