Explain one effect on PF of the increase in each of the two taxes outlined in Appendix 2. Tax on people's income: . Explanation: . . . . . Tax on profit made by businesses: . Explanation: . . . . .

Award 1 mark for each effect (max 2).
Award a maximum of 3 additional marks for each explanation of the effect of the increase in each tax - one of which must be applied to this context.

Relevant effects of the increase in tax on people's income might include:
- Consumers will have less income to spend - may reduce demand for products - leads to lower sales and revenue
- Little effect on sales of non-luxury products - as consumers may still make purchases of lower priced goods - so output remains at a similar level
- If seen as a lower priced alternative product - then may even see sales increase - as customers switch from higher priced competing products
- Employees may ask for a wage increase to return their take home pay to what it was before the increase in tax level - if successful then wage costs will increase
- Employees may not be as motivated as now lower pay after tax - may reduce output/efficiency

Relevant effects of the increase in tax on profit made by businesses might include:
- May leave less profit to be retained for future investment in the business reduces investment in the business - may become less competitive in the future leading to lower sales
- Owner will be left with less profit to be received in dividends -less incentive to carry on with the risks of owning a business
- Discourages existing/new shareholders from investing in the business -so will have to look for other ways to obtain funds

For example: Consumers will have less income available to spend (1) as the increase in tax will reduce their take-home pay (1) may reduce demand for PF's shoes (app) which will lead to lower sales and revenue (1).

Application could include: rubber shoes; natural rubber raw material; build a new factory; 20 workers; paid a weekly wage; selling in a mass market; bank loan for new factory; sister wants to invest in the business; \$100 000; 2\% rise tax on incomes; \(4 \%\) rise in tax on profits; information from Appendix 3.