Three Questions

A) Suppose there is a bill to increase the tax on cigarettes by $1 per pack coupled with an income tax cut of $500. Suppose a person smokes an average of 500 packs of cigarettes per yearand would thus face a tax increase of about $500 per year from the cigarette tax at the person's current level of consumption. The income tax measure would increase the person's after-tax income by $500.

Would the combined measures be likely to have any effect on the person's consumption of cigarettes? Why or why not?

B) Suppose a firm finds that the marginal product of capital is 60 and the marginal product of labor is 20. If the price of capital is $6 and the price of labor is $2.50, describe how the firm should adjust its mix of capital and labor? What will be the result?

C) Please explain why the law of diminishing returns applies only in the short-term period