Beer is not a Giffen good. A long hot summer increases the demand for beer. At t

Question

Beer is not a Giffen good. A long hot summer increases the demand for beer. At the same time, a tax is placed on the sale of beer (paid by producers). As result of these two events, if beer is sold competitively:

a) Equilibrium price and quantity will rise.
b) Equilibrium price will rise; quantity will fall.
c) Equilibrium price will fall; quantity will rise.
d) Equilibrium price will rise; it is not possible to determine what happens to equilibrium quantity with the information provided.
e) Equilibrium quantity will fall; it is not possible to determine what happens to equilibrium price with the information provided.

Explanation / Answer

The increased demand means consumers will pay more for the same amount of beer. The tax means the brewer will charge more for the same amount of beer. Based on that, we know the equilibrium price will increase. (This eliminates answers c and e). Because we don't know anything about the shape of the initial or changed supply and demand curves, we cannot say for certain what will happen to the quantity. (The answer is d).

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