Imagine the government imposes an excise tax on sellers of soft drinks containing more than 10% sugar. Which effect is most likely in the market for soft drinks?

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BlackTom AI · Accepted Answer

An excise tax on sellers raises their per-unit cost, shifting the supply curve left (a decrease in supply), so equilibrium price rises and quantity falls. 1) Relevant knowledge points and concepts - An excise tax on producers increases marginal cost per unit, which is equivalent to a leftward (upward) shift of the supply curve by the tax amount. - Equilibrium is found where supply and demand intersect; when supply shifts left, the new intersection has a higher price and lower quantity. - Tax incidence (how the tax burden is split between buyers and sellers) depends on price elasticities, but in all cases quantity traded falls relative to the pre-tax equilibrium. 2) Step-by-step reasoning - Represent initial supply S and demand D intersecting at (P0, Q0). - Imposing a per-unit tax t on sellers means for any quantity Q sellers need a buyer price P_b such that P_b - t = price received by sellers. Equivalently, supply as a function of buyer price moves left: S_new(P_b) = S_old(P_b - t). - Find new equilibrium where S_new(P) = D(P). Because S_new lies to the left of S_old, the intersection point occurs at a higher buyer price P1 > P0 and a lower quantity Q1 < Q0. 3) Intermediate steps (symbolic) - Initial equilibrium: S_old(P0) = D(P0). - New supply: S_new(P) = S_old(P - t). - New equilibrium: S_old(P1 - t) = D(P1) with P1 > P0 and Q1 = D(P1) < Q0. 4) Why the correct answer is correct - Option (a) explicitly describes the standard result: a decrease in supply (leftward shift) leads to a higher market price and smaller quantity consumed. That matches the analysis above. 5) Why other options are incorrect - (b) An increase in supply is the opposite of what a tax does; that would lower price and increase quantity, so incorrect. - (c) An increase in demand is unrelated to a seller tax; demand would need to shift right to raise price and quantity, which the tax does not cause. - (d) “A contraction in supply leading to a smaller quantity” is partly true but incomplete: it omits the corresponding higher price effect; option (a) is the precise complete statement. 6) Conclusion The correct choice is a. This matches the provided answer: "A decrease in supply leading to a higher price and smaller quantity of soft drinks consumed."

Imagine the government imposes an excise tax on sellers of soft drinks containing more than 10% sugar. Which effect is most likely in the market for soft drinks?Single choice

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