Question:
In order to reduce the price of an essential consumer good, the government has decided to provide a per unit subsidy. As a result, the price of the good will fall most when the price elasticity of:
(1) supply is elastic.
(2) supply is inelastic.
(3) demand is elastic.
(4) demand is inelastic.
(5) supply is unitary elastic.
Correct Answer:
(4)
Answer Explanation:
The incidence (benefit) of a subsidy falls more heavily on the side of the market that is relatively more inelastic. For consumers to experience the largest price reduction, their demand must be highly inelastic.
Topic: Elasticity Year: 2023
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