Question

If a soda tax is implemented and demand for soda is price elastic, the decline in equilibrium quantity would be ________ and the increase in equilibrium price would be ________ than if demand were inelastic.

a. larger, smaller

b. smaller, smaller

c. smaller, larger

d. larger, larger

Answer 1

An imposition of tax increases the price of soda.

However, of demand for soda is inelastic then buyer has to bear greater burden of tax relative to when demand for soda is elastic.

So, the equilibrium price increases in greater magnitude when demand is inelastic relative to when demand is elastic.

When price of soda will increase, its quantity demanded will decrease with greater magnitude when demand is elastic relative to when demand is inelastic.

So,

If a soda tax is implemented and demand for soda is price elastic, the decline in equilibrium quantity would be larger and the increase in equilibrium price would be smaller than if demand were inelastic.

Hence, the correct answer is the option (a).