Suppose that the city of atlanta decided to tax cheeze and a $1 per cheeseburger meal...

Suppose that the city of atlanta decided to tax cheeze and a $1 per cheeseburger meal tax is proposed. would you predict that the price of a cheeseburger meal would raise by a dollar in atlanta. explain with the help of a diagram

Expert Solution

Considering fairly elastic demand and supply, a cheeseburger meal tax of $1 per cheeseburger will be shifting the demand curve to the down (if imposed on consumers) by $1 per cheeseburger. Otherwise it will shift the supply curve to the left by $1 per cheeseburger (if imposed on sellers). However, the resultant price will increase by less than $1.

This happens because the extent of change in price depends on the price elasticity of demand and supply. Unless the demand and / or supply are perfectly elastic or inelastic, the shift in demand or supply will increase the price but by less than the size of tax. This happens as the tax is shared between buyers and sellers and so the price does not increase by full for consumers.

Take the case of inelastic demand. The tax shifts the demand down from DD to D'D' and the price rises from P0 to P1. Note that tax size is P1 - P2 = $1 but price rise is P1 - P0 which is less than $1.

Similarly, in the case of elastic demand, the tax shifts the demand down from DD to D'D' and the price rises from P0 to P1. Again the tax size is P1 - P2 = $1 but price rise is P1 - P0 which is less than $1.

This shows that unless the demand and / or supply are perfectly elastic or inelastic, the shift in demand or supply will increase the price but by less than the size of tax

Rahul Sunny answered 1 month ago

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