President Clinton has seized upon the cigarette excise tax as an expedient and politically correct means of increasing federal revenue. In 1994 the federal government took in $12 billion from the present 24-cents-per-pack tax. If the tax were quadrupled to $1 a pack, Clinton figures tax revenues would increase by more than $50 billion over three years. Those added revenues would help finance the health care reforms the president so dearly wants.

Professor Gary Becker, a Nobel Prize-winning economist at the University of Chicago, says Clinton's math is wrong. The White House assumed that cigarette sales would drop by 4 percent for every 10 percent increase in price. Professor Becker says that reflects only the first-year response to higher prices, not the full adjustment of smokers' behavior. Over a three-year period, cigarette consumption is likely to decline by 8 percent for every 10 percent increase in price?twice as much as Clinton assumed. As a result, the $1-a-pack tax will bring in much less revenue than President Clinton projected.

Source: Gary S. Becker, "Warning: A Higher Cigarette Tax May Be Hazardous to Health Financing," BusinessWeek, August 15, 1994, p. 18.

According to Professor Becker, by how much would cigarette prices have to rise to get a 15 percent reduction in smoking in

Instructions: Enter your response as a percentage and to one decimal place.

(a) One year?

p

What are the main differences between traditional economics and behavioral economics? Traditional economics is mainly theoretical. Cl Behavioral economics does not take as a given that decision makers are rational. 0 Traditional economics assumes that decision makers are fully' informed. Identify the population being studied and the sample chosen. The midterm exam scores of 5 out of the 22 students in your economics class. Answer Population: All students taking an economics class. "Sample: 5 out of the 22 students in your economics class, Population: All students in your economics class.Three economic questions must be determined in all societies. What are they? ()a) What is the opportunity cost of production? Does the society have a comparative advantage in production? Will consumers desire the goods being produced? O b) What goods will be produced? How will goods be produced? For whom will goods be produced? ( c) What will the price of each good be? Who will produce each good? Who will consume each good? d) How much will be produced? When will it be produced? How much will it cost? How do microeconomics and macroeconomics differ? ()a) Microeconomics studies aggregate decision making, while macroeconomics examines individual decision making- (b) Microeconomics utilizes positive economic analysis, while macroeconomics utilizes normative economic analysis. c) Microeconomics is concerned with consumer behaviour, while macroeconomics is concerned with firm behaviour. ()d) Microeconomics studies individual decision making, while macroeconomics examines aggregate decision making