Assume that the lost output due to tax distortions is proportional to the square of the tax rate.If the government increased the tax rate from 25% to 40%,the lost output would increase by a factor of

Question

Quizplus · Accepted Answer

The lost output is proportional to the square of the tax rate, so if the tax rate is increased from 25% to 40%, the lost output would increase by a factor of:

(0.40/0.25)^2 = 2.56

Therefore, the best choice is D.

Assume That the Lost Output Due to Tax Distortions Is