Consider the market for salt and diamonds. Compared to the deadweight loss from
ID: 1155164 • Letter: C
Question
Consider the market for salt and diamonds. Compared to the deadweight loss from the same percentage tax on diamonds, what happens to the deadweight loss from imposing a tax on salt? A. the deadweight loss will be the same for both salt and diamonds B. the deadweight loss will be greater for salt C. the deadweight loss will be greater for diamonds D. not enough information is given to compare the deadweight losses of these two products Consider the market for salt and diamonds. Compared to the deadweight loss from the same percentage tax on diamonds, what happens to the deadweight loss from imposing a tax on salt? A. the deadweight loss will be the same for both salt and diamonds B. the deadweight loss will be greater for salt C. the deadweight loss will be greater for diamonds D. not enough information is given to compare the deadweight losses of these two productsExplanation / Answer
Answer : Option C is the correct answer.
Because salt is a necessary good where diamond is a luxury good. In case of necessary good the demand is inelastic and hence there is no matter what would be the price after tax imposition ; because of inelastic demand after tax imposition the price for salt will be high and demand for salt will change by a little percentage. But this demand change will be less than the demand change of elastic demand and hence the deadweight loss for inelastic demand is less than the deadweight loss for elastic demand. On the other hand, as diamond is a luxury good, the demand for diamond is elastic, and hence after tax imposition the price for diamond will rise and demand for diamond will fall greater than the changed demand of inelastic demand and hence the deadweight loss for elastic demand is higher than the deadweight loss of inelastic demand.
Now, according to the given statement, if tax is imposed on salt and by this same tax amount both salt market and diamond market's deadweight loss is compared then from the above discussion it is clear that the deadweight loss for salt will be less than the deadweight loss for diamond. Or, you can say the deadweight loss for diamond will be higher than the deadweight loss of salt.