If the absolute value of the tax elasticity of supply is 0.8,a tax decrease of 10 percent will
A)Increase output by 8 percent and decrease tax revenues.
B)Increase output by 12.5 percent and increase tax revenues.
C)Decrease output by 12.5 percent and increase tax revenues.
D)Decrease output by 8 percent and increase tax revenues.

Question

Quizplus · Accepted Answer

If the absolute value of the tax elasticity of supply is 0.8, a tax decrease of 10% would increase the quantity supplied by 0.8 x 10% = 8%. The increase in output would lead to a decrease in tax revenue, as less tax would be collected from the lower tax rate and the smaller tax base. Therefore, the correct choice is A.

If the Absolute Value of the Tax Elasticity of Supply