Assuming a normal upward-sloping supply curve and downward-sloping demand curve, if the government imposes a $25 tax on expensive handbags and collects the tax from suppliers, the price of expensive handbags will:
A)increase by $25.
B)increase by more than $25.
C)increase by less than $25.
D)increase, but we cannot determine by how much.

Question

Quizplus · Accepted Answer

When a tax is imposed on suppliers, it increases their costs and reduces their profits. Therefore, they will supply less of the product at every given price. This shifts the supply curve to the left, causing the equilibrium price to rise but by a smaller amount than the amount of the tax. Therefore, the price of expensive handbags will increase by less than $25.

Assuming a Normal Upward-Sloping Supply Curve and Downward-Sloping Demand Curve