In 2011, Americans smoked 16 billion packs of cigarettes. They paid an average retail price of $5.00 per pack.
a. Given that the elasticity of supply is 0.5 and the elasticity of demand is 0.4, derive linear demand and supply curves for cigarettes.
b. Cigarettes are subject to a federal tax, which was about $1.00 per pack in 2011. What does this tax do to the market-clearing price and quantity?
c. How much of the federal tax will consumers pay? What part will producers pay?