Suppose the price of milk is $2.39 per gallon,and the equilibrium quantity of milk is 100 thousand gallons per day with no tax on milk.Starting from this initial situation,which of the following scenarios would result in the smallest deadweight loss?
A)The price elasticity of demand for milk is 0.3,the price elasticity of supply for milk is 0.7,and the milk tax amounts to $0.40 per gallon.
B)The price elasticity of demand for milk is 0.2,the price elasticity of supply for milk is 0.5,and the milk tax amounts to $0.30 per gallon.
C)The price elasticity of demand for milk is 0.2,the price elasticity of supply for milk is 0.7,and the milk tax amounts to $0.30 per gallon.
D)The price elasticity of demand for milk is 0.1,the price elasticity of supply for milk is 0.5,and the milk tax amounts to $0.20 per gallon.

Question

Quizplus · Accepted Answer

The smallest deadweight loss occurs when the tax is smallest and the demand and supply are least elastic. Option D has the smallest tax ($0.20) and the lowest elasticity of demand (0.1), leading to the smallest deadweight loss.

Suppose the Price of Milk Is $2