Suppose there is a bill to increase tax on cigarettes by $1 per pack coupled wit

Question

Suppose there is a bill to increase 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 year--- and would thus face a tax increase of about $500 per year from the cigarette tax at the persons current level of consumption. The income tax measure would increase the persons after tax income by $500. Would the combined measures likely to have any effect on the persons consumption of cigarettes? why or why not? Suppose there is a bill to increase 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 year--- and would thus face a tax increase of about $500 per year from the cigarette tax at the persons current level of consumption. The income tax measure would increase the persons after tax income by $500. Would the combined measures likely to have any effect on the persons consumption of cigarettes? why or why not? Suppose there is a bill to increase 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 year--- and would thus face a tax increase of about $500 per year from the cigarette tax at the persons current level of consumption. The income tax measure would increase the persons after tax income by $500. Would the combined measures likely to have any effect on the persons consumption of cigarettes? why or why not? Suppose there is a bill to increase 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 year--- and would thus face a tax increase of about $500 per year from the cigarette tax at the persons current level of consumption. The income tax measure would increase the persons after tax income by $500. Would the combined measures likely to have any effect on the persons consumption of cigarettes? why or why not?

Explanation / Answer

Any increase in price of a product leads to decrease in its demand. Levy of tax on a commodity or increase in tax on a commodity results in an increase in its price. This increase in price leads to fall in quantity demanded of said commodity.

It has been provided that $1 per pack tax has been levied on the cigarettes. A person smoking 500 packs of cigarettes per year will now have additional tax liability of $500 on account of smoking of cigarettes.

But it has also been stated that government is providing a tax cut of $500 as well.

However, point to note is that this tax cut of $500 will increase the purchasing power of person as a whole.

This increased purchasing power will be devoted to wide range of commodities that this person consume and not just cigarettes.

On the other hand, tax is specifically on cigarettes and thus will raise the price of cigarettes exclusively for said person.

As increase in income due to tax cut could not entirely be shifted towards the increased expenditure on cigarettes as consumption basket of consumer have other goods as well on which he may use his increased income.

So, this consumer will feel the price increase with respect to cigarettes and thus persons consumption of cigarettes will fall or decrease.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.