Assume that the demand for cigarettes is Qd=1600-30P and the supply of cigarettes is Qs=1400+70P: a. Calculate the equilibrium price and quantity and show them on a supply and demand diagram. b. Suppose the government levies a $2 tax for each unit of cigarettes sold. Draw this on the diagram and calculate the new equilibrium price and quantity. c. Calculate the price elasticity of demand given these two price and quantity points. Is the demand for cigarettes price elastic or inelastic on this part of the demand curve? Interpret the elasticity in words (i.e. If the prices rises by 10%, by what percentage will consumption fall?) d. On a graph, identify the tax revenue generated by this tax. e. Indicate each area on the graph with a letter and show in a table the consumer surplus and the producer surplus before and after the tax. Also, indicate the deadweight loss associated with this tax. f. If your policy advisor boss wanted you to provide him/her with arguments in favor of this cigarette tax, what would you say? g. If your policy advisor boss wanted you to provide him/her with arguments against this cigarette tax, what would you say?
1. Assume that the demand for cigarettes is Qd=1600-30P and the supply of cigarettes is Qs=1400+70P:
a. Calculate the
and demand diagram.
b. Suppose the government levies a $2 tax for each unit of cigarettes sold.
Draw this on the diagram and calculate the new equilibrium price and
quantity.
c. Calculate the price elasticity of demand given these two price and
quantity points. Is the demand for cigarettes price elastic or inelastic on
this part of the demand curve? Interpret the elasticity in words (i.e. If the
prices rises by 10%, by what percentage will consumption fall?)
d. On a graph, identify the tax revenue generated by this tax.
e. Indicate each area on the graph with a letter and show in a table the
consumer surplus and the
indicate the
f. If your policy advisor boss wanted you to provide him/her with
arguments in favor of this cigarette tax, what would you say?
g. If your policy advisor boss wanted you to provide him/her with
arguments against this cigarette tax, what would you say?
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