The Government of Trinidad and Tobago (GOTT) in the 2021 National Budget announced a 20% increase in the excise duty on locally manufactured tobacco products, as well as a 20% increase in the customs duty on imported tobacco from the common market origin and extra-regional sources. Your friend John believes that this tax will result in the closure of WITCO, the company at which he is currently employed, because four years ago a 15% increase in tax was levied by the GOTT. Additionally, John says the company has been facing increased competition from local distributors who sell cheaper illicit and legal brands. John’s friend Simon however does not believe WITCO will ever “shut down” because the demand for cigarettes is price inelastic. According to Simon, WITCO experienced increased profits in 2018 and 2019 in spite of the increased price of cigarettes that was due to the 15% excise duty tax introduced in October 2016. Please indicate if you support Simon’s argument and provide an explanation to support your response. (Hint: In your response please explain price elasticity of demand, inelastic demand, your views on if the demand for cigarettes is inelastic and your reasons for stating this, as well as discuss the impact that elasticity has on demand, revenue and consequently the possible impact on profits).
The Government of Trinidad and Tobago (GOTT) in the 2021 National Budget announced a 20% increase in the excise duty on locally manufactured tobacco products, as well as a 20% increase in the customs duty on imported tobacco from the common market origin and extra-regional sources. Your friend John believes that this tax will result in the closure of WITCO, the company at which he is currently employed, because four years ago a 15% increase in tax was levied by the GOTT. Additionally, John says the company has been facing increased competition from local distributors who sell cheaper illicit and legal brands. John’s friend Simon however does not believe WITCO will ever “shut down” because the demand for cigarettes is price inelastic. According to Simon, WITCO experienced increased profits in 2018 and 2019 in spite of the increased price of cigarettes that was due to the 15% excise duty tax introduced in October 2016. Please indicate if you support Simon’s argument and provide an explanation to support your response. (Hint: In your response please explain price elasticity of demand, inelastic demand, your views on if the demand for cigarettes is inelastic and your reasons for stating this, as well as discuss the impact that elasticity has on demand, revenue and consequently the possible impact on profits).
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The Government of Trinidad and Tobago (GOTT) in the 2021 National Budget announced a 20% increase in the excise duty on locally manufactured tobacco products, as well as a 20% increase in the customs duty on imported tobacco from the common market origin and extra-regional sources. Your friend John believes that this tax will result in the closure of WITCO, the company at which he is currently employed, because four years ago a 15% increase in tax was levied by the GOTT. Additionally, John says the company has been facing increased competition from local distributors who sell cheaper illicit and legal brands. John’s friend Simon however does not believe WITCO will ever “shut down” because the demand for cigarettes is price inelastic. According to Simon, WITCO experienced increased profits in 2018 and 2019 in spite of the increased price of cigarettes that was due to the 15% excise duty tax introduced in October 2016. Please indicate if you support Simon’s argument and provide an explanation to support your response. (Hint: In your response please explain price elasticity of demand, inelastic demand, your views on if the demand for cigarettes is inelastic and your reasons for stating this, as well as discuss the impact that elasticity has on demand, revenue and consequently the possible impact on profits).
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