Suppose the tax on liquor is increased so that the tax goes from being a \"mediu

Question

Suppose the tax on liquor is increased so that the tax goes from being a "medium" tax to being a "large" tax. As a result, it is likely that:

a. tax revenue increases, and the deadweight loss increases.

b. tax revenue increases, and the deadweight loss decreases.

c. tax revenue decreases, and the deadweight loss increases.

d. tax revenue decreases, and the deadweight loss decreases.

a. tax revenue increases, and the deadweight loss increases.

b. tax revenue increases, and the deadweight loss decreases.

c. tax revenue decreases, and the deadweight loss increases.

d. tax revenue decreases, and the deadweight loss decreases.

Explanation / Answer

Tax essentially creates deadweight loss. So, when tax amount increases (from medium to large), tax revenue increases but deadweight loss increases as well.

Correct option (a)

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