Consider the market for cigarettes. The government might institute a new tax that will require all sellers of cigarettes to pay the government a tax of $22 per carton of cigarettes.
Suppose that an inexpensive and simple method makes it suddenly very easy for anyone to quit smoking. Consumers can more easily lower their consumption of cigarettes in response to increases in the amount they must pay (tax included) for cigarettes.
As a result of this new method to quit smoking, a more elastic demand curve emerges. Suppose that supply remains the same (elastic). Now that demand is relatively more elastic, what will be the effect of the $22 tax?
A. The after-tax quantity will be lower than when demand was relatively inelastic.
B. The after-tax quantity will be higher than when demand was relatively inelastic.
C. The after-tax demand price will be higher than when demand was relatively inelastic.
2007-11-04 14:01:58 · 2 answers · asked by Anonymous in Social Science ➔ Economics
"A", same as always. The legitimate dealers will sell less, collected taxes will be lower, and bootlegging, Indian reservation sales, etc, etc, will go up. Politicians will jump up and down and proclaim they've cured smoking, crime and the heartbreak of saraiosis.
2007-11-04 14:29:15 · answer #1 · answered by Bob H 7 · 0⤊ 1⤋
they key is elasticity. in a market the burden of tax goes to the side of the market that is more inelastic. I think answer is A. just because if its easy for smokers to quit they will leave the market as ciggies cost more and therefore Quan Demand goes down. an elastic curve now means that a change in price will now lead to a bigger % change in demand.
2007-11-04 17:40:17 · answer #2 · answered by P4BZ 4 · 0⤊ 0⤋