May I know how to calculate to get the correct answer (D)? Q4. Good X has a price elasticity of demand equal to –1.5. In such circumstances, a per unit sales tax on Good X of £5 will lead to which of the following? A A rise in the price charged to consumers of more than £7.50. B A rise in the price charged to consumers of £7.50. C A rise in the price charged to consumers of between £5 and £7.50. D A rise in the price charged to consumers of less than £5.
Hi ominming This is covered in detail in ASET, however in summary, a sales tax can be represented by an upward shift in the supply curve. In this case, it is a per unit sales tax of £5, so the supply curve will shift vertically upwards by £5. Such a tax usually increases the price paid by consumers, decreases the net income of suppliers and decreases the equilibrium quantity traded. If the demand curve is vertical, ie demand is perfectly inelastic, the full amount of the tax would be passed to the consumer and so the price rise would also be £5. However, in this case the demand curve is downward-sloping and so the price rise will be less than £5, hence Option D is the correct answer. Hope that helps Gresham
