With a current $12-per-pack government tax on cigarettes, is the statement true or false: “The government can raise its tax revenue by increasing the per-unit tax on cigarettes”? (1) True (2) False

What this question is really testing

A per-unit (excise) tax changes two things at once: the tax collected on each pack and the number of packs sold. So you have to think in terms of total revenue, not just the tax rate.

Tax revenue as a function of the tax

If the per-pack tax is $t$, government tax revenue is $$R(t)=t\cdot Q(t),$$ where $Q(t)$ is the equilibrium quantity of cigarettes sold when the tax is $t$.

• When $t$ goes up, the government gets more per pack.
• But higher taxes push up the consumer price and reduce sales, so $Q(t)$ typically goes down.

Why the statement is false without more information

Because $R(t)$ depends on both $t$ and $Q(t)$, raising the tax could:

• increase revenue if quantity falls only a little (demand is relatively inelastic), or
• decrease revenue if quantity falls a lot (demand is relatively elastic, or if the tax increase sharply reduces legal sales).

So it is not guaranteed that starting from $12 per pack$, increasing the tax will raise revenue.

Quick check using elasticity intuition

A common rule of thumb: revenue is more likely to rise when demand is inelastic, and more likely to fall when demand is elastic. The question gives no elasticity (or demand/supply) information, so “can raise” is not something you can mark true as a general statement here.

Therefore, the correct choice is (2) False.