Question

The following scenarios describe the price elasticity of supply and demand for a particular good. All else equal (equilibrium price, equilibrium quantity, and size of the tax), in which scenario will government revenues be the highest? Choose only one.

a. Elastic demand, inelastic supply.
b. Inelastic demand, inelastic supply.
c. Elastic demand, elastic supply.
d. Inelastic demand, elastic supply.

Answer 1

Answer:

. Inelastic demand, inelastic supply. 

Explanation:

If demand is inelastic, a small change in price has little or no effect on the quantity demanded.

If supply is inelastic, a small change in price has little or no effect on the quantity supplied.

Government tax increases the cost of a good. If tax is levied on a good and both demand and supply are inelastic, government revenue would increase and be the highest when compared to the other options.

Demand is elastic when a change in price has a greater effect on the quantity demanded.

Supply is elastic if a small change in price has a greater effect on the quantity supplied.

If demand or supply is elastic and government imooses tax, revenue would fall as quantity demanded would fall.

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