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Question # 37
Revisit
The tax on cigarette is increased by 20%. As a result, Sally reduces her cigarette consumption by 25%. What is the
percentage change in tax revenue received by the government from Sally?
Answers
Given: The tax on cigarette is increased by 20%. As a result, Sally reduces her cigarette consumption by 25%.
To Find: The percentage change in tax revenue received by the government from Sally
Solution:
Let say tax on cigarette = x
Earlier consumption = E
Tax revenue = Ex
tax is increased by 20 % Hence new tax = 1.2x
reduces her cigarette consumption by 25%
New consumption = E - (25/100)E = 3E/4
New tax revenue = 1.2x * 3E/4 = 0.9Ex
Loss on revenue = Ex - 0.9Ex = 0.1 Ex
percentage change in tax revenue = (0.1Ex/Ex) * 100 = 10 % Loss
percentage change in tax revenue received by the government from Sally
is Loss of 10 %
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