Which of the following statements is true for markets in which the demand curve slopes downward and the supply curve slopes upward?
A)As the size of the tax increases,tax revenue continually rises and deadweight loss continually falls.
B)As the size of the tax increases,tax revenue and deadweight loss rise initially,but both eventually begin to fall.
C)As the size of the tax increases,tax revenue rises initially,but it eventually begins to fall;deadweight loss continually rises.
D)As the size of the tax increases,tax revenue rises initially,but it eventually begins to fall;deadweight loss falls initially,but eventually it begins to rise.

Question

Quizplus · Accepted Answer

As the size of the tax increases, tax revenue rises initially due to the higher price that consumers are willing to pay. However, as the tax increases, it causes a decrease in demand and an increase in supply. This, in turn, causes the price paid by consumers to increase and the price received by producers to decrease. The decrease in demand and increase in supply lead to a reduction in output, causing tax revenue to eventually fall. At the same time, deadweight loss continually rises since the tax creates inefficiencies in the market.

Which of the Following Statements Is True for Markets in Which