Asked by
Sarine Hajjar
on Nov 17, 2024
Verified
Assume the price of gasoline is $2.00 per gallon, and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss?
A) The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.20 per gallon.
B) The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.4; and the gasoline tax amounts to $0.20 per gallon.
C) The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon.
D) There is insufficient information to make this determination.
Deadweight Loss
Deadweight loss represents an economic inefficiency that happens when a good or service doesn't reach or cannot reach its equilibrium point.
Price Elasticity
An economic measure indicating how the quantity demanded of a product changes in response to a change in the price of that product.
Equilibrium Quantity
The equilibrium quantity is the quantity of goods or services that is supplied and demanded at the equilibrium price, where supply equals demand.
- Analyze the impact of elasticity of demand and supply on the magnitude of deadweight loss.
Verified Answer
KF
Learning Objectives
- Analyze the impact of elasticity of demand and supply on the magnitude of deadweight loss.