Suppose there is currently a $4 per pack tax on cigarettes that generates $40,000 in revenue per month. If the tax increases to $6 per pack, the revenue the tax generates will increase to $55,000. This tells us that, in this range of tax rates, the _______ effect outweighs the _______ effect.

Question

Quizplus · Accepted Answer

The increase in tax (and therefore price) leads to higher revenue despite potentially lower quantities sold, indicating the price effect (higher revenue per unit) outweighs the quantity effect (fewer units sold).

Suppose There Is Currently a $4 Per Pack Tax on Cigarettes