Answered step by step
Verified Expert Solution
Question
1 Approved Answer
8. Suppose that the price elasticity of demand for cigarettes is unity (=1) at all possible quantities. Currently, 30 million packs of cigarettes are sold
8. Suppose that the price elasticity of demand for cigarettes is unity (=1) at all possible quantities. Currently, 30 million packs of cigarettes are sold per year, and the price averages $2 per pack. Assuming that the price elasticity of supply of cigarettes is 1 and the current tax rate is $0.40 per pack, calculate the current excess burden of the tax on cigarettes. Suppose the tax per pack is increased to $0.80 per pack. What will happen to the excess burden of the tax as a result of the tax increase? Under what circumstances can a doubling of the tax on cigarettes actually improve resource use in the country, despite the increase in the excess burden of the tax?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started