Scenario 5-2
The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.
-Refer to Scenario 5-2.Total consumer spending on aged cheddar cheese will
A) increase, and total consumer spending on bread will increase.
B) increase, and total consumer spending on bread will decrease.
C) decrease, and total consumer spending on bread will increase.
D) decrease, and total consumer spending on bread will decrease.

Question

Quizplus · Accepted Answer

The decrease in demand for both goods due to the income tax increase will cause a decrease in total consumer spending on both goods. However, since the supply of aged cheddar cheese is inelastic, the decrease in demand will not significantly affect the price of the cheese, and therefore the decrease in consumer spending on aged cheddar cheese will be relatively small. On the other hand, since the supply of bread is elastic, the decrease in demand will cause a significant decrease in price, which will lead to a larger decrease in consumer spending on bread. Therefore, total consumer spending on aged cheddar cheese will decrease, and total consumer spending on bread will also decrease, making option D the correct answer.

Scenario 5-2 the Supply of Aged Cheddar Cheese Is Inelastic, and the and the Supply