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The figure shows a market with perfectly inelastic demand
The figure shows a market with perfectly inelastic demand. Which of the following is TRUE regarding the figure? 1. The tax decreases the equilibrium quantity from 1,000 to 900 units. ii. The tax increases the price buyers pay from $10 to $11. iii. The tax creates a deadweight loss of area ABC. Select one: O a. li and ill only O b. ii only O c. i only O d. i and ii only e. i and iii only
Expert Solution
Option A is incorrect as quantity reamins same at 1,000 when supply curve shifts to its left due to tax and demand curve is inelastic. Initial equilibrium was A and post tax equilibrium is B.
As demand is inelastic, consumers pay the whole tax or we can say that they are unresponsive to change in price which means price paid by consumer rises from $10 to $11. Thus, this statement is correct.
Option C is incorrect as there would be no deadweight loss.
Option B is correct.
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