Suppose an excise tax is imposed on product X. We expect this tax to

Question

Quizplus · Accepted Answer

When an excise tax is imposed on a product, the price of that product increases. This makes the product less affordable for consumers, reducing the overall demand for it. As a result, consumers may look for substitute products that are cheaper or offer similar benefits. In this case, the demand for substitute product Z is likely to increase. Similarly, consumers may reduce their demand for complementary good Y if they are now spending more on product X, reducing their overall purchasing power. Therefore, the demand for complementary good Y is likely to decrease. Hence, option B is the correct answer.

Suppose an Excise Tax Is Imposed on Product X