Final answer:
The effect on revenue when the tax on a commodity is diminished by 10% and its consumption increases by 10% is a 3% decrease.
Step-by-step explanation:
To find the effects on revenue when the tax on a commodity is diminished by 10% and its consumption increases by 10%, we can use a formula. Let's assume the initial tax is T and the initial consumption is C. After the tax is diminished by 10%, the new tax would be 0.9T. Similarly, after the consumption increases by 10%, the new consumption would be 1.1C. The effect on revenue can then be calculated as:
New Revenue = New Tax x New Consumption = 0.9T x 1.1C = 0.99TC
The question concerns the effect on tax revenue from a simultaneous decrease in the tax rate on a commodity and an increase in its consumption. To find the net effect, we assume that the original tax revenue is equal to 1 (for simplicity), representing 100%.
A 10% decrease in tax would decrease revenue to 0.9 (90% of original). Then, a 10% increase in consumption, applied to this new revenue, would multiply it by 1.1 (110%). So, the new revenue is 0.9 × 1.1 = 0.99 of the original revenue, which is a 1% decrease.
This means that the new revenue is 0.99 times the initial revenue. Since 0.99 is less than 1, the effect on revenue is a 3% decrease.