Consider four markets for luxury yachts, Markets A, B, C, and D. The demand for

Question

Consider four markets for luxury yachts, Markets A, B, C, and D. The demand for yachts in Market A is perfectly elastic. In Market B the price elasticity of demand, as an absolute value, is 3. In Market C the price elasticity of demand, as an absolute value, is 0.25. Finally, the demand for yachts in Market D is perfectly inelastic.

The elasticity of supply in all four markets is identical across every level of quantity. Answer the following questions.

Consider four markets for luxury yachts, Markets A, B, C, and D. The demand for yachts in Market A is perfectly elastic. In Market B the price elasticity of demand, as an absolute value, is 3. In Market C the price elasticity of demand, as an absolute value, is 0.25. Finally, the demand for yachts in Market D is perfectly inelastic.

The elasticity of supply in all four markets is identical across every level of quantity. Answer the following questions.

If the government imposes the same size tax on all of these markets, which of the following statements will be true? A.  The deadweight loss in Market C will be the smallest. B.  The deadweight loss in Market A will be the smallest C.  The deadweight loss in Market B will be the smallest. D.  The deadweight loss in Market D will be the smallest.

Explanation / Answer

D is the answer i.e. The deadweight loss in Market D will be the smallest.

Market D is perfectly inelastic i.e.here the supply and demand for its product (or services) are totally unaffected when the price of that product changes whereas Market A, being "perfectly elastic" is in a situation in which the supply and demand for its product will vary significantly due to the change in price. And of course, Markets B and C are in the middle.

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