Demonstration of SelfTest Questions

Supply curve shift

Which of the following explanations is the most likely cause of the shift of the supply curve to S1 in the diagram below?

	a)	the imposition of a specific tax
	b)	a flat rate increase in wages
	c)	a subsidy on the good
	d)	the imposition of an ad-valorem tax
Please select an answerNo, not quite. You are right that a tax will shift the supply curve to the left, but a specific tax is a fixed rate of tax at all price levels (as with cigarette and many alcohol taxes). This will shift the supply curve parallel.An increase in wages will shift the supply curve to the left, but this is more likely to shift the supply curve parallel as it is a flat rate increase in wages.No. A subsidy will shift the supply curve the other way - to the right.Yes, well done. An ad-valorem tax is a percentage tax and so the amount of the tax depends on the price level (tax is a percentage of price). This means that at lower prices, the amount of the tax is less and so the supply curve shifts less.