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    Question

    A government decides to impose a tax on sugary drinks to discourage consumption due to health concerns. If the demand for sugary drinks is relatively inelastic, what is the likely impact of this tax on:

    i) Quantity demanded of sugary drinks

    ii) Tax revenue collected by the government

    A i) Decrease significantly, ii) Decrease Correct Answer Incorrect Answer
    B i) Decrease slightly, ii) Increase Correct Answer Incorrect Answer
    C i) Remain unchanged, ii) Increase Correct Answer Incorrect Answer
    D i) Increase slightly, ii) Decrease Correct Answer Incorrect Answer
    E i) Increase significantly, ii) Remain unchanged Correct Answer Incorrect Answer

    Solution

    When demand is inelastic, consumers are less responsive to price changes. Therefore, even with the tax-induced price increase, the quantity demanded of sugary drinks will decrease only slightly. However, since the tax is applied to each unit sold, the government will collect more tax revenue due to the relatively stable demand.

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