Suppose a public referendum is being held on whether or not to levy a tax oncigarettes. Currently, the supply of cigarettes is given by Qs = -100 + 30P. You estimate thedemand for cigarettes to be Qd = 200 - 10P.You are asked to evaluate the likely effects of a tax on cigarettes equal to$10 per pack ofcigarettes. Specifically, you are to file a report which predicts by how much this will reduce theamount of cigarettes sold. You are also asked to estimate the proportion of the tax that will bepaid by the cigarette companies (sellers), and the proportion of the tax that will be paid by thesmokers (consumers) of cigarettes.To do this, you will first need to calculate the current price and quantity of cigarettes sold.
a) (6 points) What is the equilibrium price and quantity of cigarettes?
Next you know from your economics class that you will need to know the price elasticity ofdemand and the price elasticity of supply of cigarettes.(Note: for parts b-e, please leave youranswers in the form of a fraction.)b) (6 points) What is the price elasticity of demand for cigarettes at the equilibrium price?
c) (6 points) What is the price elasticity of supply of cigarettes at the equilibrium price?
Using your answers to b) and c), you are now able to determine what proportion of the tax willbe paid by buyers, and what proportion of the tax will be paid by sellers.d) (6 points) What proportion of the tax will be paid by sellers?
e) (6 points) What price will buyers pay after the tax is imposed?
f) (6 points) What quantity of cigarettes will be sold after the tax?
Finally, a new proposal suggests that the tax should be levied on the cigarette companies insteadof the smokers.
g) (6 points) From what you have learned in this class, how should you respond to this proposal?
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