Question

When Paul listened to the presidential candidate debates, he heard one candidate proposing to increase taxes and the other candidate responding that this would cause firms to decrease production. How would this be described by an economist?a) As taxes increase, there is an increase in supply. b) As taxes increase, there is a decrease in quantity supplied.c) As taxes increase, there is an increase in quantity supplied. d) As taxes increase, there is an increase in supply and in quantity supplied e) As taxes increase, there is a decrease in supply.

Answer 1

e) As taxes increase, there is a decrease in supply.

Step-by-step explanation:

In the context, it is said that one of the presidential candidate in his presidential debate proposes to increase the taxes of the various goods and commodities in order to increase the government revenue through he tax paid by the citizens of the country. Whereas other candidate in the debate opposes such a proposal claiming that increasing tax will result in the decrease of the production of such goods and items in the firm.

As an economist, I conclude that there is a relation between increase in tax and the production units. when the tax of a certain item is increased, its demand decreases in the market. The buyer has to pay more money and the producer or the seller receives less money, So the product demand decreases in the market. As the demand decreases, the firms produces less number of that items. Thus there is a decrease in the supply.