Two cheeses, French Roquefort and Italian Gorgonzola, are similar enough to be substitute goods. A tax on Roquefort will have what effect on the market for Gorgonzola?
The correct answer and explanation is:
Correct Answer:
A tax on Roquefort will increase the demand for Gorgonzola.
Explanation:
When two goods are substitutes, it means consumers view them as alternatives. If the price of one goes up, many consumers will switch to the other. French Roquefort and Italian Gorgonzola are both blue cheeses and are close enough in flavor and function that they serve as substitutes in the market.
If the government imposes a tax on Roquefort, its price will rise. This price increase will make Roquefort less attractive to buyers. Since consumers still want blue cheese, they will begin purchasing more Gorgonzola instead. As a result, the demand for Gorgonzola will rise.
In economic terms, this is a classic example of the law of demand working with the concept of substitute goods. When the price of a good increases due to taxation, the quantity demanded for that good decreases. At the same time, the demand for its substitute increases as people shift their purchases to the now relatively cheaper alternative.
The demand curve for Gorgonzola will shift to the right, showing an increase in quantity demanded at each price level. This could also lead to a higher price for Gorgonzola if the supply remains constant, as sellers respond to the increased demand. In the long run, producers of Gorgonzola may even expand production to meet the higher demand.
Overall, taxing Roquefort indirectly benefits the market for Gorgonzola, giving it a competitive advantage by making it more attractive in terms of price and availability to consumers who are sensitive to changes in cost.