If the demand for a good is price elastic in comparison to one that is price inelastic, then:
A) a higher per-unit sales tax will generate more tax revenue.
B) a higher per-unit sales tax will generate less tax revenue.
C) changes in total per-unit sales tax revenue brought about by a price change go in the same direction as the price change.
D) none of the above is true.

Question

Quizplus · Accepted Answer

If the demand for a good is price elastic, then consumers are more sensitive to price changes and will decrease their consumption significantly in response to a price increase. Therefore, when a higher per-unit sales tax is imposed on the good, the price paid by consumers increases, leading to a decrease in demand and sales. As a result, the tax revenue generated from the sales of the good will decrease. On the other hand, if the demand for a good is price inelastic, consumers are less sensitive to price changes, and the tax revenue generated from the sales of the good will be less affected by a higher per-unit sales tax.

If the Demand for a Good Is Price Elastic in Comparison