Figure 8-13

-Refer to Figure 8-13.Panel (a)and Panel (b)each illustrate a $4 tax placed on a market.In comparison to Panel (b),Panel (a)illustrates which of the following statements?
A) When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively elastic.
B) When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic.
C) When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively elastic.
D) When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.

Question

Figure 8-13

-Refer to Figure 8-13.Panel (a)and Panel (b)each illustrate a $4 tax placed on a market.In comparison to Panel (b),Panel (a)illustrates which of the following statements?
A) When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively elastic. 
B) When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic. 
C) When supply is relatively inelastic, the deadweight loss of a tax is smaller than when supply is relatively elastic. 
D) When supply is relatively elastic, the deadweight loss of a tax is larger than when supply is relatively inelastic.

Quizplus · Accepted Answer

Panel (a) shows a relatively inelastic demand for the good since the increase in price due to the tax does not significantly reduce the quantity demanded. Panel (b), on the other hand, shows a relatively elastic demand since the increase in price due to the tax significantly reduces the quantity demanded. When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is relatively inelastic. This is because a larger change in quantity demanded results in a larger loss of consumer and producer surplus, causing a larger deadweight loss. Therefore, option B is the correct answer.

Figure 8-13 -Refer to Figure 8-13.Panel (A)and Panel (B)each Illustrate a $4