Question

Suppose the government decides to enact a new tax on T-shirts. What will happen in the market for T-shirts? (Note: Neither the supply curve nor the demand curve for T-shirts is perfectly inelastic.)

Answer 1

Answer: B. The tax on T-shirts will cause a deadweight loss.

C. The price consumers pay for T-shirts will be higher.

D. The quantity of T-shirts sold will decrease.

Explanation:

The tax will cause a dead weight loss because the Economy is inefficient. By introducing taxes, the Supply and Demand Equilibrium changes and because of this, production shifts to a point where it is not efficient which reduces the welfare of the economy. That loss in welfare is the Deadweight loss.

As a direct result of taxes, consumers usually have to shoulder the burden. The tax will be added to the good which will increase it's price so that the producers are able to pay the Government the taxes required and still have enough for profit.

The Quantity of shirts sold will reduce. As neither the supply nor the demand curve for the T-shirts are perfectly Inelastic, an increase in price will reduce demand but depending on the Elasticity it might not be by a lot but so long as it is not perfectly Inelastic, the demand will reduce.

Answer 2

Answer:

- The price buyers will pay will be higher

- The tax on T shirts will cause a dead weight loss

- There will be a decrease in T shirts sold

Explanation:

In this scenario when curve for demand and is not perfectly inelastic it means that with an increase in price there is a fall in the amount of a good demanded.

So when tax is imposed on the T shirts the producers will have a higher cost of production. This is transfered to the buyer in form of higher prices.

Since the increase in price reduces quantity demanded, the buyer will buy less T Shirts at the higher price

Dead weight loss is a cost to society as a result of inefficiency non the market.

When taxes are applied supply and demand go out of equillibrum as prices are now higher. Therefore tax imposition causes a dead weight loss.