Suppose the Demand for Wine Is Elastic and That Initially

question 86

Multiple Choice

Suppose the demand for wine is elastic and that initially 5 million bottles of wine are produced and consumed in Australia. If the government imposes a tax of $2 per bottle of wine, the government will collect

• A) less than $10 million in tax revenues.
• B) $10 million in tax revenues.
• C) more than $10 million in tax revenues.
• D) an amount that may be more than, equal to, or less than $10 million in tax revenues depending on the price elasticity of demand.

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Definitions:

Inelastic

Characterizing a situation where a change in price leads to a relatively small change in the quantity demanded or supplied.

Share of Income

The portion of total income (either personal or national) that is received by an individual, household, or socioeconomic group.

Elastic

A demand curve on which percentage quantity changes more than percentage price is said to be elastic, or sensitive to price. If |e| > 1, demand is elastic, where e is the price elasticity of demand. If |e| = 0, demand is perfectly inelastic while if |e| is infinite, demand is perfectly elastic. If |e| 5 1, demand is unit elastic.

Normal Good

A good for which demand increases when consumer income rises, and falls when consumer income decreases, all else being equal.