Question

The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%. Total consumer spending on aged cheddar cheese will:
a. increase, and total consumer spending on bread will increase.
b. increase, and total consumer spending on bread will decrease.
c. decrease, and total consumer spending on bread will increase.
d. decrease, and total consumer spending on bread will decrease.

Answer 1

Answer:

The correct answer is (D)

Explanation:

The supply of cheddar cheese is inelastic which means the price will not affect the supply of cheddar cheese. Similarly, cheddar cheese and bread are considered normal goods and an increase in the income tax will decrease the demand. In that regard, the overall consumer spending on cheddar cheese and bread will decrease due to the decrease in demand by 10%.