Consider a 10% excise tax that is similarly applied to good X,which has a price elasticity of 2.7,and to good Y,that has a price elasticity of 0.6.We can predict that the excess burden of this tax in the market for good X will be ________ the excess burden in the market for good Y.
A)no larger than
B)equal to
C)smaller than
D)larger than
E)2.1 times the size of

Question

Quizplus · Accepted Answer

The excess burden, or deadweight loss, of a tax is directly related to the price elasticity of demand in the market affected by the tax. A higher price elasticity of demand means that the quantity demanded is more responsive to changes in price, which leads to a larger deadweight loss. In this case, good X has a higher price elasticity of demand (2.7) than good Y (0.6), which means that the excess burden in the market for good X will be larger than in the market for good Y. Therefore, the correct answer is D, larger than.

Consider a 10% Excise Tax That Is Similarly Applied to Good