📚 Learning Guide
Elasticity of Demand and Taxation
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If the government imposes a per-unit tax on a good with inelastic demand, what is the most likely effect on the quantity demanded of that good?

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Choose the Best Answer

A

The quantity demanded will decrease only slightly.

B

The quantity demanded will decrease significantly.

C

The quantity demanded will remain unchanged.

D

The quantity demanded will increase due to consumer's perceptions of value.

Understanding the Answer

Let's break down why this is correct

Answer

When the government imposes a per-unit tax on a good with inelastic demand, the quantity demanded of that good will not change much. Inelastic demand means that consumers will continue to buy nearly the same amount of the good even if the price increases. For example, if a tax is placed on essential medicine, people will still need to buy it despite the higher cost, because they cannot easily find substitutes. This happens because the good is necessary for them, so they are less sensitive to price changes. Therefore, the tax mainly affects the price consumers pay rather than the quantity they purchase.

Detailed Explanation

When demand is inelastic, people still buy the good even if the price goes up. Other options are incorrect because Some might think that a tax will scare people away from buying; It's a common mistake to think that taxes don't affect demand at all.

Key Concepts

Elasticity of Demand
Taxation
Consumer Behavior
Topic

Elasticity of Demand and Taxation

Difficulty

medium level question

Cognitive Level

understand

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