Good A has a price elasticity of demand of .27, while good B has a price elasticity of demand of 2.9. To raise the most tax revenue, the government should:
A) place a unit tax on good A.
B) place a unit tax on good B.
C) raise the price elasticity of demand for good A.
D) subsidize the production of good B.

Question

Quizplus · Accepted Answer

Goods with lower price elasticity of demand, like good A with a price elasticity of .27, are less sensitive to price changes, meaning consumers are less likely to reduce their quantity demanded significantly in response to a tax. Therefore, taxing such goods typically generates more revenue compared to goods with higher elasticity, like good B with a price elasticity of 2.9, where consumers would significantly reduce their quantity demanded in response to a tax.

Good a Has a Price Elasticity of Demand of