The government heavily subsidizes the production of ethanol to encourage the purchase of ethanol over oil, a less environmentally friendly form of energy. Given that the supply elasticity of ethanol, , is estimated to be about 0.13, what would the elasticity of demand, , have to be for consumers to receive at least half of the subsidy, and therefore encourage ethanol consumption?
A) must be less than 0.13.
B) must be greater than 0.13.
C) must be more inelastic than the elasticity of supply.
D) Both A and C.
Question 2
If the supply curve is perfectly inelastic and the demand curve is a downward sloping straight line, what is the effect of a consumer ad valorem tax on equilibrium price and quantity?
A) Price remains unchanged and quantity increases.
B) Price decreases and quantity increases.
C) Price decreases and quantity remains unchanged.
D) Price and quantity decrease.
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