Question

In a market where the supply curve is perfectly inelastic, how does an excise tax affect the price paid by consumers and the quantity bought and sold?

a) The price paid by consumers increases, and the quantity bought and sold remains unchanged.
b) The price paid by consumers remains unchanged, and the quantity bought and sold decreases.
c) The price paid by consumers decreases, and the quantity bought and sold increases.
d) The price paid by consumers increases, and the quantity bought and sold decreases.

Answer 1

In a market with a perfectly inelastic supply curve, an excise tax leads to higher prices for consumers while the quantity bought and sold remains unchanged.

Step-by-step explanation:

In a market where the supply curve is perfectly inelastic, the imposition of an excise tax will cause the price paid by consumers to increase because the quantity supplied is fixed regardless of the price, meaning sellers cannot respond to tax by changing the quantity they produce. Therefore, the entire tax is passed on to consumers in the form of higher prices. As the supply does not change with the price, the quantity bought and sold remains unchanged.

The correct answer to the question, therefore, is that the price paid by consumers increases, and the quantity bought and sold remains unchanged. This result reflects the fact that with a perfectly inelastic supply, producers cannot absorb any of the tax by reducing their quantity supplied, as it does not vary with price changes.