Suppose the government decides to enact a new tax on T-shirts. What will happen in the market for T-shirts? (Note: Neither the supply curve nor the demand curve for T-shirts is perfectly inelastic.)

B. The tax on T-shirts will cause a deadweight loss.

C. The price consumers pay for T-shirts will be higher.

D. The quantity of T-shirts sold will decrease.

Explanation:

The tax will cause a dead weight loss because the Economy is inefficient. By introducing taxes, the Supply and Demand Equilibrium changes and because of this, production shifts to a point where it is not efficient which reduces the welfare of the economy. That loss in welfare is the Deadweight loss.

As a direct result of taxes, consumers usually have to shoulder the burden. The tax will be added to the good which will increase it's price so that the producers are able to pay the Government the taxes required and still have enough for profit.

The Quantity of shirts sold will reduce. As neither the supply nor the demand curve for the T-shirts are perfectly Inelastic, an increase in price will reduce demand but depending on the Elasticity it might not be by a lot but so long as it is not perfectly Inelastic, the demand will reduce.

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