Question

1. Buyers of new cars can consider Internal Combustion Engine (ICE) cars or new electric cars (EVs). If the price of ICE cars goes up because of a higher carbon tax, then the demand for EV cars will increase. Is it True or False?

2. An increase in the cost of aluminium will cause the supply of soft-drink cans to increase. Is it True or False?

3.The incidence of a tax is shared between buyers and sellers in the long run, whether or not the industry is constant cost. Is it True or False

4. An increase in the demand for avocados will in the short run, lead to a rise in the equilibrium price of avocados and more growers will enter the industry. Is it True or False

Answer 1

1.The statement is true. The reason is that ICE cars and EV cars are substitutes. When ICE cars price goes up becuase of higher carbon tax, people will shift buying pattern to its substitute which is EV cars. Hence demand for EV cars will increase.

2. Alluminium is an input to making of soft drinks cans. When alluminium cost increases, it means cost of making a soft drink can will also increase. With rising costs, suppliers would supply less at the ongoing price. Hence supply of soft drink cans will decrease. Hence statement is false.

3.The tax incidence on buyers and sellers depends on the elasticity of demand and supply. In the short run the tax incidence is more on that side whose price elasticity is more inelastic. However, in the long run, there is more time to adjust to the tax imposed and hence elasticity is more elastic for both supplier and buyers in the long run. Regardless of what kind of cost industry tax is imposed in, in the long run due to adjustment of price elasticity, sellers and buyers share the tax burden. Hence the statement is true.

4. When demand for avocados increase, its price rises and the existing growers in the perfectly competitve market, earn higher profits (positive economic profits). In a PC market equilibrium, sellers earn zero economic profits. This opens up the market to entry of new growers. Hence positive economic profits welcomes new growers until the growers in the market again start earning zero economic profits. Thus statement is true.