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l. Elasticity and Taxation: Consider the following market demand curve for cigarettes: Qd = 75-.5P. When the market price is $10, market demand is 70
l. Elasticity and Taxation: Consider the following market demand curve for cigarettes: Qd = 75-.5P. When the market price is $10, market demand is 70 units. 1When price rises to $12, the market demand curve alls to 69 units. a. Calculate the price elasticity of demand as the price rises 'om $10 to $12. Explain & interpret in words. b. Ifthe government creates a per-unit tax of $2 per pack of cigarettes, effectively causing this price increase, how much revenue will the government raise? c. Explain why the government would use a per-unit tax on cigarettes instead of other possible interventions to correct the market failure associated with the negative externalities of smoking. (1. How much surplus are consumers losing 'om this intervention? (See graph below) E 150
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