Question

In the country of bora bora, consumers buy large quantities of alcohol, tobacco, and coffee. Last year, the prices of these goods each increased by 10 percent. The quantities demanded for these goods fell by 10, 3, and 8 percent, respectively. If the government is thinking about imposing a unit tax on one of these goods, which good should they choose to tax to raise the most tax revenue, and why?

Answer 1

Answer: it will be beneficial for the government to tax tobacco to raise more revenue.

Explanation:

Elasticity of demand for alcohol, tobacco, and coffee are,

$Elasticity of alcohol=\frac{10}{10}$

$=1$

$Elasticity of tobacco= \frac{3}{10}$

=0.3

$Elasticity of coffee=  \frac{8}{10}$

=0.8

Elasticity of demand is inelastic for Tobacco. Thus, it will be beneficial for the government to tax tobacco in order to raise more revenue.