Question

Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent.

Refer to Scenario 5-2. The equilibrium price will

a. decrease in both the aged cheddar cheese and bread markets.

b. increase in both the aged cheddar cheese and bread markets.

c. increase in the aged cheddar cheese market and decrease in the bread market.

d. decrease in the aged cheddar cheese market and increase in the bread market.

Answer 1

a. Decrease in both the aged cheddar cheese and bread markets.

Explanation:

When the supply of aged cheddar cheese is inelastic and the supply of bread is elastic,and both goods are considered to be normal goods by a majority of consumers ,a large income tax increase decreases the demand for both the goods by 10 Percent,the equilibrium price will decrease in both the aged cheddar cheese and bread markets because imposition of tax causes inward shift of the supply curve, causing increase in price of both the goods considered normal goods here, thereby profits or surplus decreases and equilibrium price thus decreases for both the goods.