Question

Suppose the City of Provo is considering adding a special sales tax on either yogurt or ice cream. Supply is essentially equivalent in both markets, but Demand for ice cream is less elastic. Assume that, prior to the tax, market price and quantity are equivalent in the two markets.

If the same per-unit tax is imposed on both markets, more revenue would be raised by the tax on ______ and more deadweight loss would occur in the market for ______.

a. Yogurt; yogurt.

b. Ice cream; ice cream.

c. Yogurt; ice cream.

d. Ice cream; yogurt.

If the same per-unit tax is imposed in both markets, buyers of frozen treats would pay

a. a larger portion of the tax on yogurt.

b. a larger portion of the tax on ice cream.

c. a different portion, depending on whether the tax is imposed on buyers or sellers.

d. the same portion of the tax in both markets.

Answer 1

Demand for ice cream is less elastic.

If the same per-unit tax is imposed on both markets, more revenue would be raised by the tax on ______ and more deadweight loss would occur in the market for ______.

The correct option is d) Ice cream; yogurt.

Since the demand for ice cream is less elastic, tax Revenue is greater from the ice -cream market as compared to yogurt.. Dead weight loss is less when demand is less elastic. Therefore, more deadweight loss world occur in the market for yogurt.

If the same per-unit tax is imposed in both markets, buyers of frozen treats would pay

The correct option is b.) a larger portion of the tax on ice cream.

Buyers of frozen treat will have to pay larger portion of the tax on ice cream because they have to bear greater burden of tax for ice cream as demand is less elastic for ice cream.