Which of the following best describes how taxes influence consumer decisions and buying power?

• A. Taxes decrease the price of goods, increasing consumers' purchasing power and leading to increased quantity demanded.
• B. Taxes increase the price of goods, reducing consumers' purchasing power and often leading to decreased quantity demanded.
• C. Taxes always result in consumers buying more goods, regardless of the price increase.
• D. Taxes have no effect on consumer decisions or buying power, as only producers are affected.

Answer: (B)

Verified step by step guidance

1. Understand the concept of taxes in microeconomics: Taxes on goods typically increase the price that consumers pay for those goods.
2. Recognize that when the price of a good increases due to taxes, the consumer's purchasing power decreases because they can now afford less with the same amount of income.
3. Recall the law of demand, which states that as the price of a good increases, the quantity demanded generally decreases, all else equal.
4. Analyze how the increase in price caused by taxes leads to a reduction in quantity demanded, as consumers may buy less or switch to substitutes.
5. Conclude that taxes influence consumer decisions by increasing prices, reducing purchasing power, and often decreasing the quantity of goods demanded.