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.

Question

Quizplus · Accepted Answer

The absolute value of the tax elasticity of supply is 0.8, which means that a 10 percent decrease in taxes will lead to an 8 percent increase in output. Since tax revenues are equal to the tax rate times the quantity of output, a decrease in taxes will lead to a decrease in tax revenues.

If the Absolute Value of the Tax Elasticity of Supply