The Government Is Considering Placing a Tax on Cigarettes to Raise

question 21

Multiple Choice

The government is considering placing a tax on cigarettes to raise revenue to finance health- care benefits. Which of the following statements is TRUE?

• A) This tax will not raise much revenue in the short term since demand is price inelastic.
• B) This is a very good way to raise revenue both in the short term and in the long term because there are no substitutes for cigarettes.
• C) The tax on cigarettes may not raise as much revenue as anticipated in the years to come because the demand for cigarettes is likely to become less elastic over time.
• D) No tax revenue can be raised in this way because sellers of cigarettes will just lower their price by the amount of the tax and therefore the price of cigarettes to consumers will not change.

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Definitions:

Accounts Payable

Liabilities of a business that are due to vendors or suppliers for goods or services received that have not yet been paid for.

Cash Payments Journal

A financial journal that records all cash outflows or payments made by a business.

Subsidiary Ledger

A ledger containing all the details of a general ledger account, allowing for more detailed information and analysis of that account.

Cash Receipts Journal

A specialized accounting journal used to record all cash inflow transactions.