Answer to Question #181550 in Microeconomics for Rosalia Kapolo

Question

What is the effect of a N$1 specific tax on equilibrium price and quantity if demand is perfectly inelastic?

Answer 1

Perfectly inelastic demand means that prices or quantities are fixed and are not affected by the other variable. Therefore, there will be no effect of a N$1 specific tax on equilibrium quantity, since the product or service is a necessity and people will still maintain the same demand no matter the price. As such suppliers will still supply the same quantity demanded by the consumers. On the other hand, the equilibrium price will rise by N$1. This is because the suppliers will increase their prices by the amount of tax increase and the tax burden will fall on the consumers, therefore, increasing the equilibrium price by the same tax amount.