If the absolute value of the tax elasticity of supply is 0.5,a tax increase of 10 percent will
A)Increase output by 5 percent and decrease tax revenues.
B)Increase output by 20 percent and decrease tax revenues.
C)Decrease output by 5 percent and increase tax revenues.

Question

Quizplus · Accepted Answer

The tax elasticity of supply measures the responsiveness of output to changes in tax levels. A positive tax elasticity of supply means that output increases as taxes decrease, and vice versa. A tax elasticity of supply of 0.5 means that output will decrease by 5 percent when taxes increase by 10 percent. Therefore, a tax increase of 10 percent will decrease output by 5 percent, leading to a decrease in tax revenues. Thus, option C is the correct answer.

If the Absolute Value of the Tax Elasticity of Supply