Question

In: Economics

Which of the following is FALSE about a Laffer curve?


Which of the following is FALSE about a Laffer curve? 

A) It illustrates the relationship between tax revenue and income tax rates 

B) Its bell-shape is due to income effect and substitution effect 

C) It is upward sloping if substitution effect is greater than income effect 

D) It is upward sloping if income effect is greater substitution effect 

E) None of above

Solutions

Expert Solution

Since the Laffer curve shows a theoretical relationship between rates of taxation and the resulting levels of government revenue.

It is bell shaped curve. When the tax rate increases, then tax revenue increases initially upto a point where curve is maximum. In this case the curve is upward sloping and here substitution effect dominates the income effects.

It means option D is false about the laffer curve.

D; It is upward sloping and here income effect dominates the substitution effects.

Rahul Sunny answered 2 years ago
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