e smoking and to raise tax revenue. The average excise tax on a pack of The tabl
ID: 1164773 • Letter: E
Question
e smoking and to raise tax revenue. The average excise tax on a pack of The table below presents the annual demand and supply schedules, in billions of packs, both before and The government taxes packs of cigarettes both to discourag after the tax on packs of cigarettes Quantity of CigarettesQuantity of Cigarettes Quantity of Cigarettus Supplied Price (dollars per pack Supplied (bilions of packs)with Tax (billions of packs) packs) 9.75 10.0 32.5 27.5 e. What is the equilibrium quantity and price per pack of cigarettes if there is no excise tax on cigaretes?Explanation / Answer
a) 35 billion packs; $7 per pack
Equilibrium is established where the quantity demanded and quantity supplied without tax is equal. This happens when the quantity is 35 billion.
The corresponding price level is 7 dollars.
b) 22.5 billion packs; $8.25 per pack
Equilibrium is established where the quantity demanded and quantity supplied with tax is equal. This happens when the quantity is 22.5 billion.
The corresponding price level is 8.25 dollars.
c) 56.25 billion
The excise duty is 2.50 dollars per pack. The quantity sold when excise duty is levied is 22.5 billion.
Hence the excise revenue is 22.5billion*2.50 dollars = $56.25 billion
d) 12.5 billion packs
Quantity demand without tax = 35 billion
Quantity demand without tax = 22.5 billion
Quantity decreased is 35 - 22.5 = 12.5 billion.
e) $1.25 per pack
Price without excise duty is $7
Price with excise duty is $8.25
Price Increase is $1.25
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