Suppose the supply-and-demand schedules for cigarettes are as follows: Price per
ID: 1114957 • Letter: S
Question
Suppose the supply-and-demand schedules for cigarettes are as follows:
Price per Carton
Quantity Demanded
Quantity Supplied
$3.00
360
160
3.25
330
180
3.50
300
200
3.75
270
220
4.00
240
240
4.25
210
260
4.50
180
280
4.75
150
300
5.00
120
320
NOTE: Quantity is in millions of cartons per year.
a. What are the equilibrium price and equilibrium quantity?
b. Now the government levies a $1.25 per carton excise tax on cigarettes. What are the new equilibrium price paid by consumers, the price received by producers, and the quantity?
c. Explain why it makes no difference whether Congress levies the $1.25 tax on the consumer or the producer. (Relate your answer to the discussion of the payroll tax in the text.)
Price per Carton
Quantity Demanded
Quantity Supplied
$3.00
360
160
3.25
330
180
3.50
300
200
3.75
270
220
4.00
240
240
4.25
210
260
4.50
180
280
4.75
150
300
5.00
120
320
Explanation / Answer
a. This is where the quantity demanded and supplied of cigarettes are equal. This is at a price of $4 and a quantity of 240.
b. With the excess tax the overall market price would be $5.25. The amount the consumers and the producers pay will depend on the elasticity of supply and demand. The more inelastic the demand curve the greater will be the burden on the consumers and less on the producers. The equilibrium quantity will fall to around 100 with the imposition of the tax.
c. The levy of the tax will be effected by the relative elasticities of the demand and supply curves and so whether it is imposed on the consumer or the producer does not matter. What matters is the relative slopes of the two curves.
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