S tax hike on tobacco take ott o ack-an increase of 62 The tax on cigarettes has
ID: 1134744 • Letter: S
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S tax hike on tobacco take ott o ack-an increase of 62 The tax on cigarettes has risen from 39 to $1.01 a pack-an increase of 62g a pack. Before the tax hike, cigarettes were $5 a pack. In the past, a price increase of 10 percent cut cigarette consumption by 4 percent. With this new tax, at least 1 million of the 45 million smokers are expected to quit. Source: USA Today, April 3, 2009 Is the demand for cigarettes elastic or inelastic? Will the price rise to $5.62 a pack? Who pays most of the tax increase-smokers or tobacco companies? The demand for cigarettes is With a tax increase of 62e a pack, the pricerise from $5.00 to $5.62 a pack O A. elastic, will O B. inelastic; will O C. elastic, will not O D. inelastic, will not The tax increase is O A. split equally by smokers and tobacco companies O B. paid totally by smokers O C. paid mostly by tobacco companies OD. paid mostly by smokersExplanation / Answer
In the past a price increase of 10 cuts the cigarette consumption by 4, which indicates price Elasticity of demand for cigarettes = ( change in quantity demanded/ change in price) = (4/10) = 0.4
The value of elasticity is less than 1, therefore demand for cigarettes is inelastic.
The price will not rise to $5.62 a pack. Before tax the price was $5 a pack and a tax of 0.62 is imposed. But it doesn't increase the price to $5.62 a pack because tax burden will be carried by both buyers and sellers. So, change in equilibrium price is less than change in tax.
As the demand side of tobacco is inelastic therefore, buyers will pay most of the tax burden.
Answer- Demand for cigarettes is inelastic. With a tax increase of 62 cents a pack, the price will not rise from $5 to $5.62 a pack.
The tax increase is imposed on both buyers and sellers but is paid mostly by smokers because demand for tobacco is inelastic and tax burden falls on the inelastic side of the market by greater amount.
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