As the tax wedge associated with a given economic activity gets ...

[tfester]

As the tax wedge associated with a given economic activity gets smaller, we would expect
 
  A) more of that economic activity to occur.
  B) people to engage in less of that particular activity.
  C) the distortions caused by taxes on that activity to be greater.
  D) no change in the practice of that activity until the tax wedge ultimately disappears.

Question 2

Tim is working on a school report on the proposed merger between American Airlines and U.S. Airways.
 
  He finds that U.S. Airways' annual revenue for 2012 rose by 3.7 percent over the previous year, while the revenue for American Airlines recorded an increase of almost 6 percent. Based on this, he concludes that, in 2012, passenger traffic must have increased more for American Airlines than for U.S. Airways. Is Tim's conclusion correct? Explain your answer.

[brittanywood]

Answer to Question 1

A

Answer to Question 2

Tim's conclusion is incorrect. While American Airlines' revenues might have increased more than U.S. Airways' annual revenue, this is not sufficient to conclude that the increase in sales was higher for American Airlines. Even if the percentage rate of growth was higher, the amount by which sales increased could have been lower. For example, a 6 percent increase over 100 (which is equal to 6.00) is still smaller than a 3.7 percent increase over 200 (which is equal to 7.40).
Tim is also possibly confused about the difference between the change in revenue and the change in quantity (in this case, number of passengers). If the two airlines face different elasticities then the same percentage change in quantity will lead to different changes in revenue for the two airlines.