Question

in an election debate, two candidates for governor are debating about whether to raise the general sales tax from 5 to 7 percent. candidate a argues that this would increase tax revenues, enabling the state to maintain essential services. candidate b argues that the tax would hurt retailers and consumers, slowing down the economy so much that it would decrease tax revenues too. what assumptions must the candidates be making in order to justify their position?

Answer 1

In order to justify their position candidate make assumption that the price effect would be larger than the quantity effect.

What is Price?

The amount of money required to obtain a certain thing is referred to as its price. Price is a measure of value in the sense that the amount people are willing to pay for a commodity signifies its value.

Concept:

Candidate A claims that raising the sales tax from 5% to 7% will enhance revenue. This suggests that the price effect is greater than the quantity effect because when taxes rise, prices rise and quantities fall; hence, tax revenue will rise only if the price effect is more than the quantity effect.

And Candidate B claims that the tax would harm merchants and customers, slow the economy, and reduce tax revenue, but only if the quantity effect outweighed the price effect.

As a result, Candidate A believes that the price effect will be greater than the quantity effect.

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