The sale of all alcoholic beverages is taxed in Budopia. If the ...

[kfurse]

The sale of all alcoholic beverages is taxed in Budopia. If the demand for alcohol in Budopia is perfectly inelastic, how much of the tax burden will be borne by the consumers and why?
 
  What will be an ideal response?

Question 2

The aggregate demand curve in the figure above shifts rightward if
 
  A) potential GDP increases.
  B) the money wage rate falls.
  C) taxes are raised.
  D) government expenditure increases.
  E) the Federal Reserve raises the interest rate.

[alexanderhamilton]

Answer to Question 1

In the absence of the tax, the equilibrium quantity and price of the beverages are determined by the interaction of the market forces of demand and supply. However, when the tax is imposed, the supply curve of these beverages shifts to the left as sellers now have to pay a tax to the government for each unit sold. In this case, demand is perfectly inelastic. Perfectly inelastic demand means that consumers are willing to pay any price to get the product. Therefore, the seller can raise the price to recoup the extra cost without losing any sales, so he or she would pass along the entire tax to the consumers.

Answer to Question 2

D

[kfurse]

YES! Correct, THANKS for helping me on my review

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