Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to a decrease in demand and a rise in equilibrium price.
B
It results in a decrease in equilibrium quantity and an increase in total revenue for the government.
C
It causes a significant shift in demand, leading to a new equilibrium that reflects the burden of the tax.
D
It has no effect on market equilibrium as the tax is uniform across all income levels.
Understanding the Answer
Let's break down why this is correct
Answer
Income elasticity of demand measures how much the quantity demanded of a good changes when people's income changes. When a good has high income elasticity, it means that if people's incomes rise, they will buy much more of that good, and if incomes fall, they will buy much less. If the government imposes a tax on such a good, it can lead to a significant decrease in demand, especially if consumers feel they cannot afford it anymore. For example, if a luxury car faces a new tax, many people might decide to postpone buying it because they feel the cost is too high now. This change in demand can shift the market equilibrium, leading to lower prices and fewer sales in the long run.
Detailed Explanation
When a tax is added to a good that people buy more of when they have more money, demand changes a lot. Other options are incorrect because This option suggests that demand decreases and prices go up; This choice says that equilibrium quantity goes down but total revenue for the government increases.
Key Concepts
income elasticity of demand
market equilibrium
elasticity and taxation
Topic
Elasticity in Market Dynamics
Difficulty
hard level question
Cognitive Level
understand
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