4.1 Recently the governor of Vermont proposed that cigarette taxes in Vermont should be increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can raise $20 million in revenue from this tax hike. He also pointed out that the neighboring state of New Hampshire was considering an increase in cigarette taxes.

A.(2 points) How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a higher tax will increase cigarette prices and thereby decrease the quantity demanded?

B.(2.5 points) If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still raise $20 million in tax revenue? Why or why not? Explain

4.2 (2.5 points) Suppose bad weather decreases the quantity of wheat by 12 percent. If the price elasticity of demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop decrease benefit or harm wheat farmers? Explain thoroughly.