If the absolute value of the tax elasticity of supply is 2.0,a tax increase of 10 percent will decrease output by
A)20 percent and increase tax revenues.
B)20 percent and decrease tax revenues.
C)5 percent and increase tax revenues.
D)5 percent and decrease tax revenues.

Question

Quizplus · Accepted Answer

A tax elasticity of supply of 2.0 means that a 10% tax increase will lead to a 20% decrease in output. As output decreases, tax revenues will decrease because there is less output being taxed. Therefore, the answer is B, which states that output will decrease by 20% and tax revenues will decrease.

If the Absolute Value of the Tax Elasticity of Supply