Suppose that the price elasticity of demand for a packet of cigar is -0.85 and the price elasticity of supply is 1.5 at market equilibrium. As a result of an increase on sales tax, the new equilibrium price rises by 15%. (a) What is the percentage change in quantity demanded of cigar? Show your calculation. (b) Explain with a relevant diagram, what will happen to total revenue in the cigar industry? (c) With the use of an appropriate diagram, explain with the above information, who will bear most of the burden between consumers and producers of the sales tax?

Suppose that the price elasticity of demand for a packet of cigar is -0.85 and the price elasticity of supply is 1.5 at market equilibrium. As a result of an increase on sales tax, the new equilibrium price rises by 15%. (a) What is the percentage change in quantity demanded of cigar? Show your calculation. (b) Explain with a relevant diagram, what will happen to total revenue in the cigar industry? (c) With the use of an appropriate diagram, explain with the above information, who will bear most of the burden between consumers and producers of the sales tax?

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter5: Elasticity Of Demand And Supply

Section: Chapter Questions

Problem 2.5P: (Determinants of Price Elasticity) Would the price elasticity of demand for electricity be more...

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