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Chapter 6: Problem 15

A tax will (LO7) a) lower price and raise supply b) lower price and lower supply c) raise price and lower supply d) raise price and raise supply

Short Answer

Expert verified
A tax will \(c)\) raise price and lower supply. This is because a tax increases the production cost for suppliers, leading to a higher price for consumers, and a reduced supply as it becomes less profitable for suppliers to produce the product.

Step by step solution

01

Understand the effect of taxes on price

When a tax is imposed on a product, it increases the production cost for suppliers, which leads to an increase in the price of that product for consumers. In general, a tax will raise the price of a product.
02

Understand the effect of taxes on supply

When a tax is applied to a product, the production cost for suppliers increases. As a result, suppliers will produce and supply less quantity of that product, as the tax makes it less profitable for them. This means that the imposition of a tax will reduce the supply of a product.
03

Choose the correct statement based on the effects of tax on price and supply

We have already established that a tax will raise the price and lower the supply of a product. So, based on our analysis, the correct answer is: c) raise price and lower supply

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