Question

Suppose an excise tax is imposed on two products X and Y, both of which have identical supply elasticities. The demand for good X is highly elastic, while the demand for good Y is highly inelastic. The deadweight loss (or excess burden) will be:________.

Answer 1

Answer:

The correct answer is: Larger for good X than good Y.

Explanation:

The elasticity of demand, also known as the price elasticity of demand, is a concept that in economics is used to measure the sensitivity or responsiveness of a product to a change in its price. In principle, the elasticity of demand is defined as the percentage change in the quantity demanded, divided by the percentage change in the price.

This inverse relationship between price and quantity generates a negative coefficient, which is why the value of elasticity in absolute value is generally taken. The elasticity of demand is expressed as Ed and depending on the ability to respond to changes in prices, the elasticity of demand can be elastic (A) or inelastic (B). The more horizontal the demand curve, the greater the elasticity of demand. Similarly, if the demand curve is rather vertical, the elasticity of demand will be price inelastic.

In general, the demand for a good is inelastic (or relatively inelastic) when the elasticity coefficient is less than one in absolute value. This indicates that variations in price have a relatively small effect on the quantity demanded of the good. A classically inelastic product is insulin. The variations in the price of insulin have a virtually zero variation in the quantity demanded. That is, it is insensitive or inelastic at the price.