c. Refer to the article to answer the final question. IN THE NEWS Professor Beck
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c. Refer to the article to answer the final question. IN THE NEWS Professor Becker Rejects Clinton's Tax Math In seeking ways to balance the federal budget, President Clinton has seized on the excise tax on cigarettes. That tax, now at 24 cents per pack, brought in around $12 billion in federal revenue last year. President Clinton says that raising that tax by $1 a pack could generate another $53 billion over the next five years. Chicago professor and Nobel laureate Gary Becker says the president is blowing smoke. A quadrupling of the excise tax will convince a lot of smokers to quit-or at least smoke less. Beca smoking is addictive, the decline in smoking won't be immediate. In the short run every 10 percent hike in the price of cigarettes will reduce consumption by only 4 percent. But in the long run, smoking will decline by about 7 percent. As a result, the tax hike will bring in only a fraction of what Clinton anticipates. use Source: Media reports, 1994 According to Professor Becker, by how much will sales decline in the long run? percentExplanation / Answer
According to Professor Becker, in the long run, the elasticity of demand is 7% i.e,. percentage change in quantity demanded/percentage change in price (7/10=0.70).
If there is $1 increase in the tax, then
Percentage change in price=Change in price/average price
i.e., change in price=6-5=1
average price=6+5/2=11/2=5.5
Therefore, percentage change in price=1/5.5=0.1818.
So, the percentage change in quantity demanded will be 0.70X0.1818=0.127=12.7%.
Therefore, according to Professor Becker, in the long run the sales will decline by 12.7%.
If there is $2 increase in the tax, then
Percentage change in price=Change in price/average price
i.e., change in price=7-5=2
average price=7+5/2=12/2=6
Therefore, percentage change in price=2/6=0.3333
So, the percentage change in quantity demanded will be 0.70X0.3333=0.233=23.3%.
Therefore, according to Professor Becker, in the long run the sales will decline by 23.3%.
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