Foundations of Microeconomics Assignment Example | Topics and Well Written Essays - 250 words

Foundations of Microeconomics - Assignment Example On the other hand, adult users are mostly addicts and as such, adults’ demand is less price elastic compared to teenagers’ demand. a) It is incorrect that a tax that does not have a deadweight loss cannot raise any revenue for the government. When the demand of a good is perfectly inelastic, a tax would have no effect on the quantity or any deadweight loss. However, the tax would still raise revenue for the government. In the graph above, the demand curve is perfectly inelastic. An introduction of tax shifts the supply curve inwards from Se to S*. The quantity supplied reduces from qe to q*. However, the price remains constant. In such a case where the demand of a good is perfectly inelastic, there is no deadweight loss yet the government is still able to raise revenue through taxation. b) It is incorrect that a tax that raises no revenue for the government cannot have any deadweight loss. When the government imposes a 100% tax on goods, sellers will not supply any of the good and the tax will raise no revenue. However, the tax has a large deadweight loss as it reduces the quantity sold to zero. When the government imposes a 100% tax on a good, there will be no supply of that good and the supply curve will be equal to the price axis. The tax will not raise any revenue for the government and it will have a large deadweight loss as shown in the figure