When the government taxes the sale of a particular type of good, either the producers of the good receive less profit, or the consumers must pay a higher price for the good, or both. If the consumers must pay a higher price, then they will demand less of that good and more of all other goods.
Q:If the above statements are true, and increased demand for a good leads to a higher price for that good, which of the following statements must also be true?
A: If the price of pencils rises and the government taxes the sale of ballpoint pens, then the producers of pens do not receive less profit.
B: If the government taxes the sale of coconuts and the price of bananas remains constant, then the producers of coconuts receive less profit.
C: If the price of coffee falls and consumers demand more tea, then the government repealed a tax on the sale of tea.
D: If the government taxes the sale of cigarettes and consumers demand more bourbon, then consumers must pay a higher price for cigarettes.
E: If consumers demand more bicycles and the producers of automobiles receive less profit, then the government taxes the sale of automobiles.
It seems to me both B & D are correct.
B: If the government taxes the sale of coconuts and the price of bananas remains constant, then the producers of coconuts receive less profit.
The price of bananas remains constant--> Demand for bananas is constant--Since demand for other products is constant, we can assume that the demand for coconut is also constant, meaning tax has no impact on consumer price, so producer bears the tax, thus reducing profit.
D: If the government taxes the sale of cigarettes and consumers demand more bourbon, then consumers must pay a higher price for cigarettes.
Since consumer demands for bourbon has increased, demand of cigarettes has decreased. Since demand for cigarettes has decreased, we can assume that price has increased due to taxation and consumer has to bear it.
Would anyone help me to eliminate D?
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