Higher Business Management – Understanding Business Practice Test

What is a likely effect of increasing VAT on consumer purchases?

It would decrease sales. It would have no effect on consumer behavior. It would increase profits for businesses. It would increase sales.

Correct Answer:

It would decrease sales.

Explanation:

Raising VAT raises the price consumers pay for goods and services. When prices go up, the quantity people buy generally falls because their purchasing power is reduced and budget constraints bite. This downward tendency in demand means fewer purchases, so sales volume is likely to drop. While some firms might try to pass the tax fully into prices, the overall effect on consumer purchases remains a decrease, and profits aren’t guaranteed to rise since higher prices can reduce volume and overall spending. The idea that there would be no effect or that sales would increase doesn’t fit how price changes influence consumer behavior.

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