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In a competitive market, there is currently no tax, and the equilibrium price is $60
In a competitive market, there is currently no tax, and the equilibrium price is $60. The market has a downward-sloping demand curve. The government is about to impose an excise tax of $4 per unit. In the new equilibrium with the tax, what price will producers receive and consumers pay if the supply curve is perfectly elastic?
a- The price producers receive remains the same($60) and the price consumers pay rises from $60 to $64
b- The price producers receive remains the same($60) and the price consumers pay rises from $60 to $68
c- The price producers receive rises from $60 to $64 and the price consumers pay remains the same($60)
d- The price producers receive rises from $60 to $68 and the price consumers pay remains the same($60)
Expert Solution
In a competitive market, there is currently no tax, and the equilibrium price is $60. The market has a downward-sloping demand curve. The government is about to impose an excise tax of $4 per unit. In the new equilibrium with the tax, what price will producers receive and consumers pay if the supply curve is perfectly elastic?
Option (a) - The price producers receive the same ($60), and the price consumers pay raises from $60 to $64is correct
The reason is that when the supply curve is perfectly elastic, in that case, it is horizontal to the x-axis. The sellers will stop selling the good even if there is a slight decrease in the price.
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