Question

If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would Question 22 options: a) increase by more than $1,000. b) increase by exactly $1,000. c) decrease by an indeterminate amount. d) increase by less than $1,000.

Answer 1

d) increase by less than $1,000

Step-by-step explanation:

This is because boat is a luxury good with a high elasticity of demand as they are sensitive to changes in price. When tax is imposed a good that is price elastic, the seller will bear much of the burden of the tax. Any attempt to pass all the burden to the buyers will reduce quantity demanded drastically and then the profit of the seller. In order to avoid this, the seller will pass a less burden of the tax the buyers and the price will increase by less than the amount of the tax.

Therefor, if the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would increase by less than $1,000.