Page Will there be deadweight loss in this scenario? Why might a government be w
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Page Will there be deadweight loss in this scenario? Why might a government be willing to sacrifice a deadweight loss in order to implement this policy? (explain in 1-2 sentences) (1 points) e. 4) DWL and Elasticity (2 points) Suppose price is 5 percent above equilibrium in two markets: a market for a necessity and a market for a luxury good. All else equal (including supply conditions), would you expect deadweight loss to be greater in the market for the luxury, or the market for the necessity? Explain briefly 5) Taxes (9 points) Suppose you have the information shown in the table below about the quantity of a good that is supplied and demanded at various prices. Price (S) Quantity demandedQuantity suppli 50 40 30 20 10 20 40 60 80 180 140 100 60 20Explanation / Answer
4)
Deadweight loss is created when consumers buy lesser goods for the increased price.
Necessity: These goods are referred to those which are most needed to lead life. As these goods are necessarily needed consumers do not reduce or increase quantity consumed for changes in price of the good. So these goods are inelastic and do not create deadweight loss in the market
Luxury goods: Whereas luxury goods are not required to lead life as necessity goods, consumers are sensitive to prices hence the demand changes for change in price. So when the price increases, consumers would buy less of goods causing the equilibrium demand and supply to shift up this would result in creation of deadweight loss in the market.
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