Neither the demand nor the supply of automobiles is perfectly elastic or inelastic. If the government imposes a $1,000 tax on automobiles, then the price of an automobile
A)increases by $1,000.
B)increases by less than $1,000.
C)increases by more than $1,000.
D)decreases by $1,000.
E)does not change.

Question

Quizplus · Accepted Answer

When a tax is imposed on automobiles, the supply curve shifts upward by the amount of the tax and intersects with the demand curve at a higher price. However, since both the demand and supply of automobiles are not perfectly elastic or inelastic, the price increase is less than the amount of the tax. Consumers may choose to buy fewer automobiles at the higher price, and producers may produce fewer automobiles due to the higher cost of production. Therefore, the price of an automobile increases by less than $1,000.

Neither the Demand nor the Supply of Automobiles Is Perfectly