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?
A) Alcohol; because the price elasticity is highest.
B) Tobacco; because the price elasticity is lowest.
C) Coffee; because it will have the lowest tax elasticity.
D) Tobacco; because it will have the highest tax elasticity.
E) Alcohol; because the burden of taxation would be more even.

Question

Quizplus · Accepted Answer

Tobacco should be taxed because it has the lowest price elasticity of demand, meaning the quantity demanded decreases the least with a price increase, leading to higher tax revenue.

In the Country of Bora Bora, Consumers Buy Large Quantities