What is the effect on tax revenue if the government increases the excise tax on a product that has an inelastic demand?
A)Tax revenue will rise.
B)Tax revenue will fall.
C)The price of the product will rise but the quantity traded will remain unchanged.
D)The price of the product will rise and the quantity traded will rise.

Question

Quizplus · Accepted Answer

An excise tax increase on a product with an inelastic demand will cause only a small decrease in the quantity demanded of the product, and consumers will still buy the product even if its price has increased. As a result, tax revenue will increase as the government collects more tax per unit sold.

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