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:
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

When an excise tax is imposed on alcoholic beverages, their price will increase, leading to a decrease in demand for alcoholic beverages. As a result, consumers will switch to non-alcoholic beverages, indicating that more non-alcoholic and fewer alcoholic beverages will be consumed. However, if consumers receive an income subsidy, their purchasing power will increase, allowing them to buy more of both goods. This will cause the consumption of non-alcoholic beverages to increase even more, while reducing the reduction in the consumption of alcoholic beverages caused by the excise tax. Therefore, the best choice is B: fewer alcoholic and more nonalcoholic beverages will be consumed.

Consumers Buy Both Alcoholic and Nonalcoholic Beverages