1. Suppose the de cigarettes is Q = P-3, where P is the price per pack of cigarettes and M is average weekly income. a. What is the equilibrium price and quantity if M 500? b. What is the elasticity of demand and elasticity of supply at this price and quantity? Suppose the government imposes a cigarette tax of $3 per pack. C. What is the new equilibrium quantity? d. What is the price paid by producers? e. What is the price faced by consumers? f. What is the government revenue from the tax? g. What is the change in producer surplus and in consumer surplus? h. How much is the tax revenue? How much is the deadweight loss? Show transcribed image text
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The government taxes packs of cigarettes both to discourage smoking and to raise tax revenue. The average excise tax on a pack of cigarettes is $2.50 per pack. The table below presents the annual demand and supply schedules, in billions of packs, both before and after the tax on packs of cigarettes.
Market for Cigarettes | |||
Price (dollars per pack) | Quantity of Cigarettes Demanded (billions of packs) | Quantity of Cigarettes Supplied (billions of packs) | Quantity of Cigarettes Supplied with Tax (billions of packs) |
$10.00 | 5.0 | 65.0 | 40.0 |
9.75 | 7.5 | 62.5 | 37.5 |
9.50 | 10.0 | 60.0 | 35.0 |
9.25 | 12.5 | 57.5 | 32.5 |
9.00 | 15.0 | 55.0 | 30.0 |
8.75 | 17.5 | 52.5 | 27.5 |
8.50 | 20.0 | 50.0 | 25.0 |
8.25 | 22.5 | 47.5 | 22.5 |
8.00 | 25.0 | 45.0 | 20.0 |
7.75 | 27.5 | 42.5 | 17.5 |
7.50 | 30.0 | 40.0 | 15.0 |
7.25 | 32.5 | 37.5 | 12.5 |
7.00 | 35.0 | 35.0 | 10.0 |
6.75 | 37.5 | 32.5 | |
6.50 | 40.0 | 30.0 | |
6.25 | 42.5 | 27.5 | |
6.00 | 45.0 | 25.0 | |
5.75 | 47.5 | 22.5 | |
5.50 | 50.0 | 20.0 | |
5.25 | 52.5 | 17.5 | |
5.00 | 55.0 | 15.0 | |
4.75 | 57.5 | 12.5 | |
4.50 | 60.0 | 10.0 |
a. What is the equilibrium quantity and price per pack of cigarettes if there is no excise tax on cigarettes?
35 billion packs; $7.00 per pack | |
35 billion packs; $8.00 per pack | |
22.5 billion packs; $7.00 per pack | |
22.5 billion packs; $8.00 per pack |
b. What is the equilibrium quantity and price per pack of cigarettes if there is a $2.50 excise tax per pack on cigarettes?
22.5 billion packs; $8.25 per pack | |
35 billion packs; $7.00 per pack | |
35 billion packs; $8.25 per pack | |
22.5 billion packs; $7.00 per pack |
c. How much tax revenue does the $2.50 per pack excise tax on cigarettes generate each year?
$87.50 billion | |
$75.00 billion | |
$56.25 billion | |
None - no cigarettes will be purchased |
d. By how many packs of cigarettes does quantity demanded decrease due to the excise tax on cigarettes?
12.5 billion packs per year | |
25 billion packs per year | |
35 billion packs per year | |
22.5 billion packs per year |
e. By how much did the price paid by consumers change due to the tax on cigarettes?
$7.00 per pack | |
$2.50 per pack | |
$1.25 per pack | |
$0.50 per pack |