Home › CA Foundation › Business Economics › Elasticity of Demand › Governments tend to raise indirect taxes on good…
Governments tend to raise indirect taxes on goods such as alcohol and tobacco mainly because the demand for these goods is:
APerfectly elastic
BRelatively elastic
CRelatively inelastic
DNegatively income elastic
Answer & Solution
Correct answer: C. Relatively inelastic
1. If demand is inelastic, a price rise from a tax cuts quantity less than proportionately.
2. So tax revenue stays high even after the price increase.
3. Alcohol and tobacco have relatively inelastic demand.
4. Hence governments raise indirect taxes on them because their demand is relatively inelastic.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.29_
Related questions
Using the Point method on a straight-line demand curve AB, elasticity at point P is given Under the Total Outlay method, demand is said to be unitary elastic when:Which of the following is NOT one of the four methods of measuring elasticity of demand liCross elasticity of demand (Ec) measures:Income elasticity of demand (Ey) is defined as:If proportionate change in demand equals proportionate change in price, the demand is:If a small change in price produces a much larger proportionate change in demand, the demaIf the price of a good changes and demand does not change at all, the price elasticity of