Suppose the elasticity of demand for Mexican food is 3.00 and the elasticity of supply is 1.20.If the government imposes a sales tax on Mexican food,which of the following occurs?
i.Less Mexican food is purchased by buyers.
ii.Less Mexican food is produced by sellers.
iii.The government receives the excess burden as revenue.
iv.Both the consumer and the producer surplus decrease.
A) i and ii
B) iii only
C) i, ii, and iv
D) iv only
E) i, ii, iii, and iv

Question

Quizplus · Accepted Answer

With an elasticity of demand of 3.00 and elasticity of supply of 1.20, a sales tax would result in a greater decrease in quantity demanded (i) than in quantity supplied (ii). Both the consumer and producer surplus would decrease (iv) due to the tax affecting both sides of the market. As for (iii), the government would indeed collect revenue from the tax, but it does not accurately describe the entire situation as it leaves out the effects on buyers and sellers. Therefore, the best choice is C.

Suppose the Elasticity of Demand for Mexican Food Is 3