Question

Suppose that the demand for apples is perfectly elastic and the government levies a tax on the producers of apples. Assume that the supply of apples is neither perfectly elastic nor perfectly inelastic.

1. How will the price paid by consumers change? Is this change bigger or smaller than the price change that would result if the demand for apples were not perfectly elastic? 2. How will the quantity of apples consumed change because of the tax? Is this change in quantity larger or smaller than the change that would result if the demand for apples were not perfectly elastic?

3. Explain the significance of your answers in both part a and part b in terms of how the tax affects the welfare of consumers in the apple market.

Please answer in 2-4 sentences.

Answer 1

a) As the demand for apples is perfectly inelastic so a tax will have no effect on the price of the apples. The consumers will substitute their demand for apples with another good after the tax.

On the other hand, if the demand was not perfectly elastic then the consumers would bear some burden of the tax.

b) The quantity of apples consumed after the tax will fall and the fall in quantity is bigger than the case in which the demand is not perfectly inelastic

c) As the demand is perfectly elastic, the consumers will neither be better off nor worse off after the tax as they will just substitute apples with another good.