Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers o

Question

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the a. supply curve will shift downward by $20, and the effective price received by sellers will increase by $20. b. supply curve will shift downward by $20, and the effective price received by sellers will increase by less than $20. c. demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20. d. demand curve will shift upward by $20, and the price paid by buyers will decrease by $20.

Explanation / Answer

Lower tax will lower the supply price for airline companies by $(50 - 30) = $20. So, they will increase the supply of airline tickets. Supply curve will shift rightward and down by $20.

However, since the advantage of lower tax burden will be distributed among buyers and sellers, effective price received by sellers will increase by less than $20.

Correct option (b).

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