The demand for cigarettes is price inelastic, but not perfectly inelastic. The s

Question

The demand for cigarettes is price inelastic, but not perfectly inelastic. The supply of cigarettes is elastic, but not perfectly elastic. If there were no price controls or other complicating regulations, what would a model of supply and demand therefore predict if a high cigarette tax were removed?

The price consumers pay would fall by the full amount of the tax.

The price consumers pay would fall by most of the amount of the tax.

The price consumers pay would be unchanged.

The price consumers pay would fall by less than half of the tax amount.

The price consumers pay would fall by the full amount of the tax.

The price consumers pay would fall by most of the amount of the tax.

The price consumers pay would be unchanged.

The price consumers pay would fall by less than half of the tax amount.

Explanation / Answer

ANS

OPTION D)

THE PRICE CONSUMERS PAY WOULD FALL BY LESS THAN HALF OF THE TAX AMOUNT.

BECAUSE TAX INCIDENCE FALLS MORE ON CONSUMER IF DEMAND ELASTICITY IS MORE THAN SUPPLY ELSATICITY. THAT MEANS IF TAX ON CIGAREETE FALLS CONSUMER GET LESS BENEFIT OF FALL OF TAX AND PRICE WHEREAS SELLERS GET MORE BENEFIT. AS DEMAND FOR CIGARATTE IS LESS ELASTIC , SELLER CAN EASILY CHARGE ANY PRICE FROM CONSUMER AND ONLY DECREASES PRICE BY ONLY LESS THAN HALF AMOUNT OF TAX

IF TAX INCRESES, CONSUMERS WILL HAVE TO PAY MORE OF IT AS COMPARED TO SELLER.

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