1. (22 points) Suppose a public referendum is being held on whether or not to le
ID: 1119670 • Letter: 1
Question
1. (22 points) Suppose a public referendum is being held on whether or not to levy a tax on cigarettes. Currently, the supply of cigarettes is given by Qs-40+7P. You estimate the demand for cigarettes to be Qd- 140-2P You are asked to evaluate the likely effects of a tax on cigarettes equal to $2 Specifically, you are to file a report which predicts by how much this will reduce the amount of cigarettes sold. You are also asked to estimate the proportion of the tax that will be paid by the cigarette companies (sellers), and the proportion of the tax that will be paid by the smokers (consumers) of cigarettes. per pack of cigarettes. To do this, you will first need to calculate the current price and quantity of cigarettes sold. a) (2 points) What is the equilibrium price and quantity of cigarettes? Next you know from your economics class that you will need to know the price elasticity of demand and the price elasticity of supply of cigarettes b) (2 points) What is the price elasticity of demand for cigarettes at the equilibrium price? c) (2 points) What is the price elasticity of supply of cigarettes at the equilibrium price?Explanation / Answer
(a) In equilibrium, Qd = Qs
140 - 2P = - 40 + 7P
9P = 180
P = $20
Q = 140 - (2 x 20) = 140 - 40 = 100
(b)
Elasticity of demand (Ed) = (dQd / dP) x (P / Qd) = - 2 x (20 / 100) = - 0.4
(c)
Elasticity of supply (Es) = (dQs / dP) x (P / Qs) = 7 x (20 / 100) = 1.4
(d)
Proportion of tax paid by sellers = Ed / (Ed + Es) = 0.4 / (0.4 + 1.4) = 0.4 / 1.8 = 0.2222 = 22.22%
(e)
Proportion of tax paid by buyers = Es / (Ed + Es) = 1.4 / (1.4 + 1.4) = 1.4 / 1.8 = 0.7778 = 77.78%
NOTE: As per Chegg answering guideline, 1st 5 parts are answered.
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