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 surplus and the producer surplus decrease.

Question

Quizplus · Accepted Answer

A sales tax will increase the price of Mexican food for consumers, causing a decrease in demand. As the demand for Mexican food is relatively elastic, the decrease in quantity demanded will be greater than the increase in price, resulting in a decrease in total revenue (P x Q). This decrease in revenue will cause producers to decrease the quantity supplied. The government will receive revenue only if the tax is greater than the change in the equilibrium price. Both consumer surplus and producer surplus will decrease due to the tax.

Suppose the Elasticity of Demand for Mexican Food Is 3