Question

Suppose the government applies a specific tax to a good where the demand elasticity, E, is -1.4, and the supply elasticity, n, is 1.2.This good would not be an ideal good for the government to tax since demand is:A. inelastic and would raise much revenueB. elastic and would raise much revenueC. inelastic and would not raise much revenueD. elastic and would not raise much revenuewhat is the tax incidence on consumers? $?

Answer 1

Answer:

The correct answer is option D.

Explanation:

The demand elasticity is -1.4.

The supply elasticity is 1.2.

Since the demand is elastic, the imposition of tax will not be profitable for the government.

The imposition of tax will increase the price of the good, this will decrease the demand for good, thus the revenue will decrease.  

The tax incidence on consumers

= E (supply) / (E (demand)) + E (supply)  

= $\frac{1.2}{1.2 - 1.4}$

= $\frac{1.2}{-0.2}$

= -6