Question

g Which of the following is true? Partial equilibrium analysis will:3)A)understate the impact of a tax for complements and overstate the impact for substitutes.B)overstate the impact of a tax for both substitutes and complements.C)understate the impact of a tax for both substitutes and complements.D)understate the impact of a tax for substitutes and overstate the impact for complements.

Answer 1

Answer:

understate the impact of a tax for substitutes and overstate the impact for complements.

Explanation:

Partial equillibrum analysis is consideration of only a part of the market to attain equillibrum. It is based on data that has restricted range. For example when the price of one good changes while others are held constant. This does not consider real life scenario that multiple prices are changing.

In this type of analysis there is less emphasis on tax on subsititutes and more for complements. This is because a single product is being considered and compliments share similar demand pattern so they are considered more.