In his fiscal year(FY0 2015 budget proposal, President Obama envisions another hike in the federal excise tax on cigarettes. He engineered a tripling of the tax-form 39 cents to $1.01 per pack- in 2009. Now he wants to hike the tax by another 94 cents, to $1.95 per pack. It's easy to see why Obama(himself a smoker) likes the idea. The 2009 tax hike brought an extra $9 billion a year into the U.S. treasury, it also reduced smoking and smoking-related health costs.This time around the Congressional Budget office projects a 94 cent tax hike will increase federal revenue by $78 billion over ten years, helping to bring down project deficits. The CBO also projects that the higher price will reduce the number of smokers by 2.5 million and the number of smoking-related deaths by 18,000 over the same period.Smokers don't like the idea at all,of course.Nor do the states,which will see their own tax revenues decline along with the cigarette sales. and convenience stores like 7-Eleven will see a big part of their profits go up in smokeIf the price of a pack of cigarettes(including taxes) was $6 before the proposed 2015 tax hike was approved.(a) what was the price after tax hike?(b) what was the (average) percentage increase in price?(c) if cigarette sales decline by 7.2 percent,what is the price elasticity of demand?

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Asked Feb 24, 2020
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In his fiscal year(FY0 2015 budget proposal, President Obama envisions another hike in the federal excise tax on cigarettes. He engineered a tripling of the tax-form 39 cents to $1.01 per pack- in 2009. Now he wants to hike the tax by another 94 cents, to $1.95 per pack. It's easy to see why Obama(himself a smoker) likes the idea. The 2009 tax hike brought an extra $9 billion a year into the U.S. treasury, it also reduced smoking and smoking-related health costs.

This time around the Congressional Budget office projects a 94 cent tax hike will increase federal revenue by $78 billion over ten years, helping to bring down project deficits. The CBO also projects that the higher price will reduce the number of smokers by 2.5 million and the number of smoking-related deaths by 18,000 over the same period.

Smokers don't like the idea at all,of course.Nor do the states,which will see their own tax revenues decline along with the cigarette sales. and convenience stores like 7-Eleven will see a big part of their profits go up in smoke

If the price of a pack of cigarettes(including taxes) was $6 before the proposed 2015 tax hike was approved.

(a) what was the price after tax hike?

(b) what was the (average) percentage increase in price?

(c) if cigarette sales decline by 7.2 percent,what is the price elasticity of demand?

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Expert Answer

Step 1

Price (p) of a cigarette pack before 2015 tax hike = $6
Tax hike proposed in 2015 budget = 94% or 0.94
Therefore, new P after tax hike = $6 + $0.94
                                                       = $6.94

Step 2

Percentage increase in P = ((price after tax hike – price before 2105 tax hike)/(price before 2105 tax hike))*100
Percentage increase in P = (($6.94 - $6)/($6))*100
                                            = ($0.94/$6)*100
                           ...

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