-If a $1 Sales Tax Is Imposed on the Sale

question 84

Multiple Choice

-If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will

• A) increase by $1 and the same number of CDs will be bought.
• B) increase by more than $1 and fewer CDs will be bought.
• C) increase by $1 and fewer CDs will be bought.
• D) not change and the same number of CDs will be bought.
• E) increase by less than $1 and fewer CDs will be bought.

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Definitions:

Kinked Demand Curve

A demand curve in oligopolistic market structures characterized by a distinct bend or kink at the current price; it reflects that price increases by one firm will not be followed by others, while price decreases will be.

Price Cut

A reduction in the selling price of products or services, often used as a strategy to increase consumer demand or compete more effectively.

Elasticity

A measure used in economics to show how much the quantity demanded of a good responds to a change in the price of that good, expressed as a percentage.

Kinked-Demand Curve

A model that suggests prices tend to be rigid or stable because businesses will follow a strategy of matching price increases but not price decreases by competitors.