Question

Suppose that the elasticity of demand for insulin is 0.1, the elasticity of demand for oranges is 1.2, and the elasticity of supply for insulin and oranges is 0.4. If the government imposes a 10 percent tax on both insulin and oranges, the decrease in the quantity of oranges is ________ the decrease in the quantity of insulin.

Group of answer choices

equals to

More information is needed to determine how the decrease in the quantity of oranges compares to the decrease in the quantity of insulin.

not comparable to

smaller than

larger than

Answer 1

A 10% tax on both insulin and oranges will shift the supply curve towards north-east. => Prices rise and quanities fall for both goods. Since, elasticity of oranges (1.2) is higher than that of insulin (0.1), the demand for orange will respond more than the demand for insulin due to a 10% price rise as a result of tax. hence, fall in demand for orange is more than fall in demand for insulin.

Therefore, if the government imposes a 10 percent tax on both insulin and oranges, the decrease in the quantity of oranges is larger than the decrease in the quantity of insulin.