The emergence of a black market ________ the elasticity of demand in the legal market for cigarettes. An increase in the tax rate can result in a decrease in the tax revenue when the elasticity of demand is ________.
A)decreases; elastic
B)decreases; inelastic
C)increases; elastic
D)increases; inelastic
E)increases; unit elastic

Question

Quizplus · Accepted Answer

The emergence of a black market increases the elasticity of demand in the legal market because consumers have more alternatives. When demand is elastic, an increase in the tax rate can lead to a decrease in tax revenue as consumers reduce their quantity demanded significantly.

The Emergence of a Black Market ________ the Elasticity of Demand