Explain the relationship between the elasticity of demand

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Reference no: EM131244252

Measures of elasticity enhance our ability to study the magnitudes of changes in quantities in response to changes in prices (or income). This is especially important for policy, where the effectiveness of a tax depends, in part, on the elasticity of demand. We see this, for example, in the issue of “sin-taxes”, which are taxes on goods that have harmful effects, like sugar-sweetened beverages or cigarettes. Revenue from these taxes could potentially be used to reduce a budget deficit or to target spending for reducing public health costs associated with, say obesity or lung cancer. Explain the relationship between the elasticity of demand, the magnitude of consumer response, and the amount of revenue collected by the tax.

Reference no: EM131244252

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