If the absolute value of the tax elasticity of supply is 0.5,a tax increase of 10 percent will
A)Increase output by 5 percent and decrease tax revenues.
B)Increase output by 20 percent and decrease tax revenues.
C)Decrease output by 5 percent and increase tax revenues.
D)Decrease output by 5 percent and decrease tax revenues.

Question

Quizplus · Accepted Answer

A tax elasticity of supply of 0.5 means that for every 1 percent increase in the tax rate, output will decrease by 0.5 percent. Therefore, a tax increase of 10 percent will result in a decrease in output by 5 percent (10 x 0.5). This will lead to a decrease in tax revenues, as there is less output being produced and taxed. Therefore, option C is the correct choice.

If the Absolute Value of the Tax Elasticity of Supply