A $0.50 tax on lemons currently generates $200 in revenue per day. If the tax increases to $2 per lemon, the revenue the tax generates will drop to $70. This tells us that in this range of tax rates, the _______ effect outweighs the _______ effect.

Question

Quizplus · Accepted Answer

The increase in tax decreases the quantity of lemons sold more significantly than the increase in revenue per lemon, indicating the quantity effect (reduction in quantity sold due to higher prices) outweighs the price effect (increase in revenue per unit due to higher tax).

A $050 Tax on Lemons Currently Generates $200 in Revenue Per