Assume the government taxes packs of cigarettes both to discourage cigarette smo

Question

Assume the government taxes packs of cigarettes both to discourage cigarette 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 Quantity of 0.1 polnts Quantity of Quantity of Cigarettes Cigarettes Cigarettes Supplied Supplied Price Demanded with Tax (dollars per (billions (billions (billions of pack) of packs) of packs) packs) Print 45 42.5 9.75 9.58 9.25 9.00 8.75 8.50 8.25 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 42.5 45 47.5 50 52.5 52.5 50 47.5 45 42.5 48 37.5 35 32.5 30 27.5 25 22.5 20 17.5 15 12.5 10 7.5 37.5 35 32.5 30 27.5 25 22.5 20 17.5 12.5 10 7.5 57.5 60

Explanation / Answer

a) When there is no tax, equilibrium Qd = Qs = 30 billion packs at a price of $7.50 per pack

b) In the presence of tax, equilibrium Qd = Qs with tax = 25 billion packs at a price of $8 per pack.

c) Tax revenue = tax x quantity = 2.50 x 25 billion = $62.50 billion

d) Due to the excise tax, the reduction in quantity is 30 - 25 = 5 billion packs

e) Tax raises the price consumers pay by $0.50 per pack from $7.50 per pack to $8.00 per pack.

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