Assume that demand is perfectly elastic and supply is upward sloping. If a specific tax is imposed on sellers then following the imposition of the tax:Group of answer choicesProducer surplus is equal to zero.Consumer surplus is equal to zero.The total price paid by buyers will increase.The price received and kept by sellers remains unchanged.b, c and d are correct.
Question
Assume that demand is perfectly elastic and supply is upward sloping. If a specific tax is imposed on sellers then following the imposition of the tax:Group of answer choicesProducer surplus is equal to zero.Consumer surplus is equal to zero.The total price paid by buyers will increase.The price received and kept by sellers remains unchanged.b, c and d are correct.
Solution
The question seems to be asking about the effects of a specific tax on a market where demand is perfectly elastic and supply is upward sloping. Here's a step-by-step analysis of each statement:
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"Producer surplus is equal to zero." - This is not necessarily true. Producer surplus is the difference between the price a producer receives and the minimum price they would be willing to sell at. Even with a tax, as long as the price received is above their minimum acceptable price, there will be some producer surplus.
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"Consumer surplus is equal to zero." - This is also not necessarily true. Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they pay. In a perfectly elastic demand scenario, consumers are willing to buy an unlimited quantity at a certain price, but not above it. If the price remains at or below this level, even with a tax, there will be some consumer surplus.
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"The total price paid by buyers will increase." - This is likely to be true. If a tax is imposed on sellers, they will typically pass on some or all of this cost to buyers in the form of higher prices.
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"The price received and kept by sellers remains unchanged." - This is unlikely to be true. If a tax is imposed on sellers, the price they receive after paying the tax (the price kept) will typically be lower, unless they can pass on the entire tax to buyers.
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"b, c and d are correct." - Based on the above analysis, only statement c is likely to be correct. Therefore, this statement is not true.
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