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

The government should choose to tax the good with the lowest price elasticity of demand, which means consumers' quantity demanded changes the least in response to a price change. In this case, tobacco's demand fell by only 3% in response to a 10% price increase, indicating the lowest price elasticity among the three goods.

In the Country of Bora Bora, Consumers Buy Large Quantities