New market price

[ranjankumarnayak5]

Consider market for a good in partial equilibrium analysis where supply is perfectly price
Inelastic and demand is perfectly price elastic. Market price is Rs. 60 when no tax is levied.
Ad volerm excise duty of 25 % is now levied. New market price,
(A) goes up by 25 %
(B) goes up by 20 %
(C) remains unchanged
(D) does not exist, as there is no market equilibrium

[ranjankumarnayak5]

friens,
please help me in getting anwer.

thanks

[Rootz]

Wouldn't the prices go up by 25%

[ranjankumarnayak5]

is the answer A

[Dr. Strange]

See  supply curve is perfect price inelastic which means producers will supply same quantity no matter what is the price.

Demand curve is perfect price elastic which means they will pay the same price no matter what happens and if the price is increased they will consume 0 and if decreased they will consume infinity.

This shows at equilibrium the price will remain unchanged because if price increases consumer will buy 0 and if decreases they will buy infinity and both cases are not sustainable.

Producers will bear all tax burden and price will remain unchanged.

Would you like me to explain price elasticity with graph? Because if you can visualise the graphs these kind of questions are piece of cake.

[Rootz]

thank you Dr Strange