Deadweight loss is greatest when ?
Correct answer: D. both supply and demand are relatively elastic
- A. supply is elastic, and demand is perfectly inelastic
- B. demand is elastic, and demand is perfectly inelastic
- C. both supply and demand are relatively inelastic
- D. both supply and demand are relatively elastic
Explanation
Deadweight loss is larger when buyers and sellers respond strongly to a tax, because quantity traded falls more sharply. That occurs when both demand and supply are relatively elastic.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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