Question

Suppose the government imposes a tax on cheese. The deadweight loss from this tax will likely be greater in the a. eighth year after it is imposed than in the first year after it is imposed because demand and supply will be less elastic in the first year than in the eighth year. b. first year after it is imposed than in the eighth year after it is imposed because demand and supply will be less elastic in the first year than in the eighth year. c. first year after it is imposed than in the eighth year after it is imposed because demand and supply will be more elastic in the first year than in the eighth year.

Answer 1

A

Step-by-step explanation:

Deadweight loss of tax measures the decrease in demand as a result of an increase in tax

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

Price elasticity of supply measures the responsiveness of quantity supplied to changes in price of the good.

Demand is less elastic in the short run because there is no enough time for consumers to find suitable and cheaper substitutes. As time goes on, demand becomes more elastic because consumers would have had enough time to find cheaper substitutes

Supply is also less elastic in the short time and more elastic in the long run