The price of a cartoon of cigarettes in Canada is $90 per cartoon (as an aside, there are 200 cigarettes in a cartoon). Per capita consumption is 1630 cigarettes, or 8.15 cartoons. Federal and provincial taxes are currently $50 per carton. Assume Canada's population is 35 million people.

(a) Suppose the two levels of government wish to increase the cigarette tax by 20%. If the elasticity of demand is 0.25, what is the additional tax revenue that the two levels of government can expect to collect? Note: The elasticity is defined as the % change in quantity demanded divided by the % change in price (relative to the initial quantity and price, not the mid-point). (b) Now suppose the elasticity is 2.00. What is the additional tax revenue that the two levels of government can expect to collect? Why do the answers to (a) and (b) differ?

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