Figure 8-10
The vertical distance between points A and B represents the original tax.
-Refer to Figure 8-10.The original tax can be represented by the vertical distance AB.Suppose the government is deciding whether to lower the tax to CD or raise it to FG.Which of the following statements is correct?
A) Compared to the original tax,the larger tax will decrease both tax revenue and deadweight loss.
B) Compared to the original tax,the smaller tax will increase both tax revenue and deadweight loss.
C) Compared to the original tax,the larger tax will decrease tax revenue and increase deadweight loss.
D) Both a and b are correct.

Question

Figure 8-10
The vertical distance between points A and B represents the original tax. 
-Refer to Figure 8-10.The original tax can be represented by the vertical distance AB.Suppose the government is deciding whether to lower the tax to CD or raise it to FG.Which of the following statements is correct?
A) Compared to the original tax,the larger tax will decrease both tax revenue and deadweight loss. 
B) Compared to the original tax,the smaller tax will increase both tax revenue and deadweight loss. 
C) Compared to the original tax,the larger tax will decrease tax revenue and increase deadweight loss. 
D) Both a and b are correct.

Quizplus · Accepted Answer

The original tax is represented by the vertical distance AB. If the government decides to raise the tax to FG, the new tax will be represented by the vertical distance FG, which is higher than AB. This means that the tax per unit of the good will increase, leading to a decrease in the quantity demanded, and thereby a decrease in tax revenue. Additionally, the increase in the tax rate will also lead to an increase in deadweight loss, as some consumers will be priced out of the market. Therefore, compared to the original tax, the larger tax will decrease tax revenue and increase deadweight loss. Option C is correct. Option A is incorrect because the larger tax will increase tax revenue if the demand is inelastic, and decrease tax revenue if the demand is elastic. Option B is incorrect because the smaller tax will decrease deadweight loss, but it may increase or decrease tax revenue depending on the elasticity of demand.

Figure 8-10 the Vertical Distance Between Points a and B Represents the Represents