The government reduces the excise tax on the sellers in a competitive industry by $10 per unit sold.Both supply and demand curves have some elasticity with respect to price.This reduction in tax means that:
A)supply curve shifts down by $10, but (unless demand is perfectly elastic)price remain constant.
B)supply curve shifts down by less than $10, but (unless demand is highly inelastic)price falls by more than $10.
C)supply curve shifts down by less than $10, but (unless demand is highly elastic)price falls by $10.
D)supply curve shifts down by $10, but (unless supply is perfectly elastic)any price decline is less than $10.
E)demand curve shift down by $10 and price falls by $10.

Question

Quizplus · Accepted Answer

The reduction in excise tax decreases the cost of production for sellers, causing the supply curve to shift down (or to the right) by the amount of the tax reduction ($10). However, the actual decrease in price depends on the elasticity of both supply and demand. If supply is not perfectly elastic, the price decline will be less than $10, as the tax reduction gets shared between consumers (through lower prices) and producers (through higher producer surplus).

The Government Reduces the Excise Tax on the Sellers in a Competitive