Asked by Katelyn Smith on May 11, 2024
Verified
Which of the following is true? Partial equilibrium analysis will:
A) overstate the impact of a tax for both substitutes and complements.
B) understate the impact of a tax for both substitutes and complements.
C) understate the impact of a tax for complements and overstate the impact for substitutes.
D) understate the impact of a tax for substitutes and overstate the impact for complements.
Partial Equilibrium
Partial equilibrium is an analysis of the equilibrium position of a single market or sector within the wider economy, without considering interactions with other markets or sectors.
Substitutes
Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.
- Distinguish between general equilibrium and partial equilibrium analysis and their respective applications.
Verified Answer
EA
Elisa AfiouniMay 14, 2024
Final Answer :
D
Explanation :
Partial equilibrium analysis only looks at the market for a specific good, ignoring the effects on related markets. For complements, an increase in price from a tax would decrease demand for both goods, but partial equilibrium analysis would only look at the decrease in demand for the taxed good and therefore underestimate the impact. For substitutes, an increase in price for one good would increase demand for the other, but again, partial equilibrium analysis only looks at the decrease in demand for the taxed good and thus overestimates the impact. Therefore, option D is the correct answer.
Learning Objectives
- Distinguish between general equilibrium and partial equilibrium analysis and their respective applications.
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