Suppose demand has price elasticity of 1 everywhere and the industry is perfectly competitive with identical firms. In the long run, tax revenue increases as tax rates increase.
Answer the following statement true (T) or false (F)
True
Rationale: Consumer spending is always the same if price elasticity is 1, and the long run supply curve is perfectly elastic -- implying taxes will be fully passed onto consumers in the long run. As tax rates rise, consumer prices rise but spending remains constant as consumers purchase less. This implies a smaller share of spending goes to producers and an increasing share is collected as tax revenue.
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