Question

the government is deciding between imposing a tax on designer brands or basic groceries. in which case would the deadweight loss of the tax be larger? group of answer choices if the tax is imposed on basic groceries because the demand for necessities is relatively less elastic. it depends on whether it is levied on consumers or producers. the deadweight loss is the same if the amount of the tax is the same. if the tax is imposed on designer brands because the demand for luxuries is relatively more elastic.

Answer 1

The deadweight loss of a tax would be larger on designer brands because they have a more elastic demand compared to basic groceries, which have an inelastic demand, leading to a larger reduction in quantity demanded. Therefore correct option is D

Step-by-step explanation:

When comparing the deadweight loss of a tax on designer brands versus basic groceries, it is essential to understand the concept of price elasticity of demand. If the demand for a good is inelastic, it means that consumers are less sensitive to price changes, and they will continue to buy the product even at a higher price. Basic necessities such as groceries typically have inelastic demand because they are essential goods that people cannot easily do without, even when prices go up. Conversely, luxury items like designer brands tend to have more elastic demand because consumers can more readily reduce their purchases or switch to substitutes in response to price increases.

Therefore, the deadweight loss of a tax would be larger if the tax is imposed on designer brands because the demand for luxuries is relatively more elastic. When demand is elastic, a tax increase leads to a more significant reduction in the quantity demanded, resulting in a larger deadweight loss. In contrast, taxing basic groceries, which have inelastic demand, would result in a smaller deadweight loss because the quantity demanded would be less responsive to the price increase caused by the tax.