Consumers buy both alcoholic and nonalcoholic beverages.If the government tries to discourage people from drinking alcoholic beverages by imposing an excise tax on them but gives consumers an income subsidy to keep the consumers on their original indifference curves, what will happen to consumption of alcoholic and nonalcoholic beverages?
A)The same amount of both goods will be consumed.
B)Fewer alcoholic and more nonalcoholic beverages will be consumed.
C)More alcoholic and fewer nonalcoholic beverages will be consumed.
D)It is impossible to determine what will happen to the consumption of alcoholic and more nonalcoholic beverages.

Question

Quizplus · Accepted Answer

The excise tax will increase the price of alcoholic beverages, making them relatively more expensive compared to nonalcoholic beverages. This will cause consumers to switch to consuming more nonalcoholic beverages and fewer alcoholic beverages. However, the income subsidy will allow consumers to maintain their original purchasing power, keeping them on their original indifference curves. Therefore, the overall effect will be a decrease in the consumption of alcoholic beverages and an increase in the consumption of nonalcoholic beverages.

Consumers Buy Both Alcoholic and Nonalcoholic Beverages