Question

The deadweight loss from a tax of $2 per unit will be smallest in a market with

a. elastic supply and inelastic demand

b. elastic supply and elastic demand

c. inelastic supply and inelastic demand

d. inelastic supply and elastic demand

Answer 1

When price of a good increases then there is no drastically reduced the supply of goods because consumers are still willing to buy the goods because goods may be necessary goods is known as inelastic supply.

When demand of a good does not change as much as the price increase is inelastic demand.

So as the dead weight loss is smallest it means the gap between buyers and sellers are also smallest which indicates that the both consumer have demand and sellers has supply.

It is possible when inelastic demand and inelastic supply occurred.

So option C is the correct statement.