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# Studies have shown that a 10% increase in the price of cigarettes

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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
Quote:
Studies have shown that a 10% increase in the price of cigarettes, only reduces demand by 4%. On the other hand, the tax imposed on luxury goods in 1991 was also 10%, but the tax revenue fell \$97 million short of projection, and yacht retailers saw a 77% drop in sales. Many of those retailers went bankrupt and had to abandon their businesses, with many people losing their jobs. Regardless, tax shifting should always be considered when setting tax policy.

Which one of the following is an assumption upon which the argument relies?

A. Tax shifting plays an important role in increasing the sales of luxury goods.

B. The tax revenue is directly propotional with the amount of sales in any given time period.

C. An increment or decrement in the percentage of tax imposed has no relation with the bankruptcy of the firms.

D. If a tax is levied on a non-price sensitive good or service — like cigarettes — it wouldnot lead to big changes such as factory shutdowns and unemployment.

E. The retailers intentionally went bankrupt in order to reduce their tax burden.

Approach --

1) Eliminate C and E, negating the choice doesn't impact the conclusion.
2) Eliminate B, out of context. We are not discussing tax revenue.

Between A and D,

negating A --> Tax shifting not necessarily plays an important role in increasing sales of luxury goods but still tax shifting should be considered when setting tax policy holds good.

Therefore, D is correct.
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
Can you explain why C is wrong?

By negating C, we get an increment or decrement in the percentage of tax imposed has relation with the bankruptcy of the firms. Therefore, tax shifting should not be considered. This breaks the conclusion! So, why not C?

Is there any difference between 'the increment or decrement in the percentage of tax' and 'tax shifting'?
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
Prethink is not clear.
Can someone help with that?
TIA.

Also, POE works. Only D makes sense.

My version of Prethink: Even though tax shifting may result in bankruptcy or loss of job, tax shifting should always be considered when setting tax policy.
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
abhi2707 wrote:
Prethink is not clear.
Can someone help with that?
TIA.

Also, POE works. Only D makes sense.

My version of Prethink: Even though tax shifting may result in bankruptcy or loss of job, tax shifting should always be considered when setting tax policy.

Not very sure about the source of this question, got wrong but now I am completely convinved about the option (D)....

Quote:
Tax shift or Tax swap is a change in taxation that eliminates or reduces one or several taxes and establishes or increases others while keeping the overall revenue the same.
(Source wikipedia)

The stimulus claims that effect of Price increase on Ciggies is nominal whereas in case of luxury goods it is very sever ( Job loss, Bankruptcy, and other effects), the conclusion states tax shifting (shifting the burden to non sensitive goods) will have minimal effect and will not lead to any sever effect..
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
I think cant say whether tax shifting can plays an important role in incresing sales although their is example that more tax can reduce the sales but cant conclude this.

So the best option left with is option D, which, 100% information is given in the passage.
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
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Re: Studies have shown that a 10% increase in the price of cigarettes [#permalink]
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