Question

The united kingdom has a drinking problem. British per-capita consumption of alcohol rose 19% between 1980 and 2007, compared with a 13% decline in other developed countries. Worried about excessive drinking among young people, the british government increased the tax on beer by 42% from 2008 to 2012. Does a specific tax substantially reduce the equilibrium quantity of alcohol? Answer in terms of the slopes of the demand and supply curves. Assume the demand curve is downward sloping and the tax is paid by consumers. A specific tax on consumers

a. Will substantially reduce the equilibrium quantity of alcohol if the demand is completely vertical.

b. Will increase the equilibrium quantity of alcohol.

c. Will substantially reduce the equilibrium quantity of alcohol if supply is relatively horizontal.

d. Will substantially reduce the equilibrium quantity of alcohol if supply is completely vertical.

e. Will substantially reduce the equilibrium quantity of alcohol if demand is relatively vertical.

Answer 1

Answer:

A is right answer................

Answer 2

In this case,the answer would be option d. given in the answer choice or Will substantially reduce the equilibrium quantity of alcohol if supply is relatively horizontal.

Explanation:

• In this case,the tax imposition on alcohol consumption will reduce the overall consumer demand of alcohol in Britain thereby,reducing the equilibrium price of alcohol.
• Now,if the supply of alcohol in the alcohol market in Britain is relatively horizontal,it implies that alcohol suppliers in the country are relatively more responsive or sensitive to any price change in alcohol market.
• Hence,following the reduction in consumer demand due to consumption tax imposition on alcohol,a relatively horizontal or elastic supply curve would indicate that after a decrease in price caused by reduction in overall consumer demand for alcohol in the market following tax imposition,the suppliers will considerably reduce the supply level of alcohol as a response to the price decrease in the market.This would lead to a substantial reduction in the equilibrium quantity of alcohol in the market in Britain.