Question

30. In a market where the supply curve is perfectly inelastic, how does an excise tax affect the price paid by consumers and the quantity bought and sold?

32. Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?

Answer 1

30) When the supply curve is perfectly inelastic then it would be a vertical straight line which means that the suppliers are not changing their quantity supplied at various prices in which case the entire excise tax is borne by the producers as the excise tax will increase the price of the good where the price received by seller decreases by the amount of tax and price received by consumers remains the same as the tax revenue is transferred to the government and there is no change in quantity bought and sold.

32) Cross price elasticity measures the degree of responsiveness of quantity demanded of left/right shoe to the change in the price of the right/left shoe.

When the shoes can be purchased only one at a time then, they would be substitute to one another and the cross price elasticity between them would be positive and equal to one(unitary) as an increase in the price of the right shoe will cause an increase in demand for the left shoe and vice versa.