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 more elastic is demand for yachts,
A) the more Q will fall and the more P will rise.
B) the less Q will fall and the more P will rise.
C) the more Q will fall and the less P will rise.
D) the less Q will fall and the less P will rise.
E) the closer is the new equilibrium point to the old.

Question

Quizplus · Accepted Answer

When demand is highly elastic, consumers are very responsive to price changes. Therefore, a tax increase will lead to a significant decrease in quantity demanded (Q falls more) because consumers will easily find substitutes or forego purchasing yachts. However, because the demand is elastic, producers cannot pass the full tax burden onto consumers in the form of higher prices (P rises less), as consumers would significantly reduce their purchases.

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