If the absolute value of the tax elasticity of supply is 8,a tax cut of 0.5 percent should cause the output supplied to
A)Increase by 16 percent.
B)Decrease by 16 percent.
C)Increase by 4 percent.
D)Decrease by 4 percent.

Question

Quizplus · Accepted Answer

The tax elasticity of supply is defined as the percentage change in the quantity supplied divided by the percentage change in the tax rate. Since the absolute value of the tax elasticity of supply is 8, a 0.5 percent tax cut should result in a 4 percent increase in output supplied.

Here's the calculation:

tax elasticity of supply = (% change in quantity supplied) / (% change in tax rate)

8 = (% change in quantity supplied) / 0.005

% change in quantity supplied = 8 * 0.005 = 0.04, or 4% increase in output supplied.

Therefore, the answer is C) Increase by 4 percent.

If the Absolute Value of the Tax Elasticity of Supply