Imagine an excise tax levied on the sellers of cigarettes. Assume that the tax is $2.00 per pack. Assume that the market for cigarettes is perfectly competitive. a. Draw a downward sloping market demand curve for cigarettes and an upward sloping supply curve. Draw the demand curve to represent fairly inelastic demand with respect to price (but not completely vertical.) Draw the supply curve to represent fairly elastic supply with respect to price (but not completely horizontal). Label the horizontal axis as the quantity of packs of cigarettes and the vertical axis the price per pack. b. What happens to the equilibrium quantity of cigarette packs once the tax is imposed? c. Is there a reduction in consumer and producer surplus? If so, show the reduction in the graph.

Imagine an excise tax levied on the sellers of cigarettes. Assume that the tax is $2.00 per pack. Assume that the market for cigarettes is perfectly competitive. a. Draw a downward sloping market demand curve for cigarettes and an upward sloping supply curve. Draw the demand curve to represent fairly inelastic demand with respect to price (but not completely vertical.) Draw the supply curve to represent fairly elastic supply with respect to price (but not completely horizontal). Label the horizontal axis as the quantity of packs of cigarettes and the vertical axis the price per pack. b. What happens to the equilibrium quantity of cigarette packs once the tax is imposed? c. Is there a reduction in consumer and producer surplus? If so, show the reduction in the graph.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter5: Elastic And Its Application

Section: Chapter Questions

Problem 6PA: The price of coffee rose sharply last month, while the quantity sold remained the same. Five people...

See similar textbooks

Similar questions

Explain why using the midpoint formula for calculating the elasticity of demand gives the same result whether price increases or decreases, but using the initial price and quantity instead of the average does not.
When someones kidneys fail, the person needs to have medical treatment with a dialysis machine (unless or until they receive a kidney transplant) or they will die. Sketch a supply and demand diagram, paying attention to the appropriate elasticities, to illustrate that the supply of such dialysis machines will primarily determine the pure.
Using the midpoint formula for calculating the elasticity of supply, if the price of a good rose from $95 to $105, what would be the elasticity of supply if the quantity supplied changed from a. 38 to 42? b. 78 to 82? c. 54 to 66?
Evaluate the following statement: Along a downward-sloping linear demand curve, the slope and therefore the elasticity of demand are both 'constant.
Define the price elasticity of supply. Explain why the price elasticity of supply might be different in the long run than in the short run.
A movie production company faces a linear demand curve for its film, and it seeks to maximize total revenue from the films distribution. At what level should the price be set? Where is demand elastic, inelastic, or unit elastic? Explain.
The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decayfigh ter, reduced the price of its electric toothbrush from $35 to $30. As a result, Stopde cays sales declined by 1,500 units per month. What is the arc cross elasticity of demand between Stopdecays toothbrush and Decayfighters toothbrush? What does this indicate about the relationship between the two products? If Stopdecay knows that the arc price elasticity of demand for its toothbrush is 1.5, what price would Stopdecay have to charge to sell the same number of units as it did before the Decayfighter price cut? Assume that Decayfighter holds the price of its toothbrush constant at $30. What is Stopdecays average monthly total revenue from the sale of electric toothbrushes before and after the price change determined in part (b)? Is the result in part (c) necessarily desirable? What other factors would have to be taken into consideration?
The equation for a supply curve is 4P=Q. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers to be the same?
If supply is elastic, will shifts in demand have a larger effect on equilibrium quantity or on price?