Question

If a state introduces a new tax of 25% on the purchase of automobiles, what is the most likely effect on future automobile sales?
Select the best answer from the choices provided.
increased automobile sales
decreased automobile sales
unchanged automobile sales
varying automobiles sales

Answer 1

Decreased automobile sales.

The prices will increase which will cause less people to buy because they can't afford the new price. Taxes on products typically deter people from buying that product because the cost will go up to absorb the cost of the new tax to the supplier. A great example of this is the tax on cigarettes. As a means to get people to quit and make more money off of those buying, many states have put large taxes on cigarettes causing the price to double within a matter of a year or two after the tax went into place.

Answer 2

The correct answer is: "decreased automobile sales ".

Imposing a tax on purchasing a good (automobile) means adding a quantity to the amount charged, therefore the price charged for the product in the market rises.

According to the law of demand, the price is inversely related to the quantity demanded, which is the amount that consumers are willing to buy at a certain price. Therefore, if the price rises due to the imposition of the tax, the amount demanded by consumers will decrease.