-What is the effect on tax revenue if the government increases the excise tax on a product that has an elastic demand?
A)It will rise.
B)It will fall.
C)It may rise or fall depending on whether the tax is a flat rate or a percentage of the price of the product.
D)It is totally unpredictable.

Question

-What is the effect on tax revenue if the government increases the excise tax on a product that has an elastic demand?
A)It will rise. 
B)It will fall. 
C)It may rise or fall depending on whether the tax is a flat rate or a percentage of the price of the product. 
D)It is totally unpredictable.

Quizplus · Accepted Answer

When demand for a product is elastic, an increase in the excise tax on that product will likely lead to a significant decrease in quantity demanded. Since consumers are sensitive to price changes for such products, the higher tax can cause a substantial drop in sales, which in turn can lead to a decrease in tax revenue collected from that product.

-What Is the Effect on Tax Revenue If the Government