6) A large tax on a pack tax on cigarettes will: Shift the supply of cigarettes

Question

6) A large tax on a pack tax on cigarettes will:

Shift the supply of cigarettes in and to the left, raising the equilibrium price and quantity of cigarettes.

Shift the demand for cigarettes in and to the left, raising the equilibrium price of cigarettes, but lowering the equilibrium price.

Shift the supply of cigarettes in and to the left, increasing the equilibrium price of cigarettes, but lowering the equilibrium quantity.

Shift the demand for cigarettes in and to the left, lowering the equilibrium price and quantity of cigarettes.

Shift the supply of cigarettes out and to right, increasing the equilibrium price of cigarettes, but decreasing the equilibrium quantity.

Explanation / Answer

A large tax on a pack tax on cigarettes will

Answer: Shift the supply of cigarettes in and to the left, increasing the equilibrium price of cigarettes, but lowering the equilibrium quantity.

Reason: Due to a large tax on a pack of cigarettes, the supply decreases then supply curve shifts to the left and when supply decreases it creates an excess demand at the old equilibrium price. This leads to competition among buyers, which raises the price. Increase in price leads to rise in supply and fall in demand. This further leads to increase in equlibrium price of cigarettes, but lowering the equlibrium quantity.

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