Scenario 8.2:
Yachts are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 30,000 yachts per year. The government, in an attempt to raise revenue, places a $20,000 tax on each yacht. Demand is highly, but not perfectly, elastic.
-Refer to Scenario 8.2. The result of the tax in the long run will be that:
A) Q falls from 30,000; P rises by less than $20,000.
B) Q falls from 30,000; P rises by $20,000.
C) Q falls from 30,000; P does not change.
D) Q stays at 30,000; P rises by $20,000.
E) Q stays at 30,000; P rises by less than $20,000.

Question

Quizplus · Accepted Answer

Given the highly elastic demand, consumers are sensitive to price changes. Thus, a $20,000 tax per yacht will decrease quantity demanded (Q falls from 30,000) and increase the price, but by less than $20,000, as some of the tax burden is absorbed by producers.

Scenario 8.2: Yachts Are Produced by a Perfectly Competitive Industry in Dystopia