Answer to Question #19295 in Microeconomics for SULOJANA NAIR

Question

7. Desperate for revenue, the federal legislature has finally decided to raise the cigarette tax. Currently the tax is five cents per pack, third lowest in the nation. A tax analyst indicates that the elasticity of supply for cigarettes is 5.0 and the elasticity of demand is –0.2.

a) Suppose the tax is increased by 35 cents. How much of the tax would be paid by consumers in the form of a higher price paid and how much would be paid by producers in the form of a lower price received?
b) North Carolina collected RM43 million in cigarette tax revenue last year. If the average price of a pack of cigarettes is RM2.50, calculate how much of an effect this tax increase will have on (1) quantity of cigarettes consumed and (2) cigarette tax revenue to the government?



8. Sony cut the price of its 42” HDTV plasma TV from RM3000 in the first quarter of 2005 to RM2500 in the second quarter. Sales increased from 25,000 to 30,000.

a) Based on this information, what is your best estimate of the price elasticit