Suppose that the (absolute value) of the elasticities of demand for apples, bananas, and peaches are 0.9, 1.6, and 0.8, respectively. Assume that the supply curves for these goods are identical and that an identical tax is levied on each good. Rank the products from highest to lowest in terms of the deadweight loss caused by the tax.

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Business

Ashly Mcgee

4 December, 05:56

Suppose that the (absolute value) of the elasticities of demand for apples, bananas, and peaches are 0.9, 1.6, and 0.8, respectively. Assume that the supply curves for these goods are identical and that an identical tax is levied on each good. Rank the products from highest to lowest in terms of the deadweight loss caused by the tax.

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Sophie Lloyd · Answer 1

Elasticity of demand impacts the dead weight loss caused by the tax.

More elastic the demand for a good, higher will be the dead weight loss caused by the tax.

The elasticity of demand for apples is 0.9

The elasticity of demand for bananas is 1.6

The elasticity of demand for peaches is 0.8

Greater the value of elasticity of demand, more elastic is the demand.

Bananas have the most elastic demand, followed by apples and then peaches.

So,

Bananas will have the highest dead weight loss followed by apples and then peaches.

Thus,

The correct order is bananas, apples, peaches.

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