Questions 20-25 are based on the following paragraph: Cigarette taxes have been
ID: 1129921 • Letter: Q
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Questions 20-25 are based on the following paragraph: Cigarette taxes have been in the news. Federal taxes per pack increased to 39 cents per pack in 2002 and the majority of states have their own high taxes. The result is the price of a pack of ciearettes has doubled since 1995 A variety of reasons have pushed the tax rates up.Part of the motrive is an effort to reduce smoking. Taxpayers often wind up paying for the tobacco induced medical bills of smokers through Medicare and Medicaid. Another reason for the price hike is that many major tobacco companies settled a series of lawsuits filed bi state and local governments. The companies agreed to pay $246 billion over 25 years into a fund to be distrubuted to the states. Afdter this settlement, cigarette companies raised the price of cigarettes by up to $1 per pack. Thewre is little doubt, thast despite the addictive attributes of nicotine, higher cigarette prices make inroads on smoking. For every 10 per cent increase in price the number of packs drops by 4 per cent. Smokers, however, then buy cigarettes that are stron ger and longer. The average tar intake has increased among people 18-24 since the prices increased. Since tar is considered a m ajor cause of lung disease and cancer the rise in taxes and cigarette prices may lead to more adverse health consequences among smokers. 20. The demand for cigarettes is (a) elastic(b) inelastic(c) unit elastic(d) none of these. 21. Cigarette prices have increased due to (a) tax increases (b) takes and legal issues(c) taste preferences(d) none of these. 22. Using tax policy to raise the price of cigarettes is an example of governement(alattempting to reduce smoking through voluntary action of smokers(b)forcing smokers to quit involuntarily(c)raising the cost of production(d) none of these.Explanation / Answer
20. Elasticity of demand = % change in quantity demanded / % change in price = - 4/10 = - 0.4 < 1
Inelastic demand
b) Inelastic
21. a) tax increase
22. b) forcing smokers to quit involuntarily.
23. a) an unintended outcome of an economic activity.
24. c) the government will raise tax money.
25. b) addiction to a product will result in an inelastic demand for that product.
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