# P of cigarettes S D Q of cigarettes

• Slides: 8

P of cigarettes S D Q of cigarettes 2. The demand supply curves of cigarettes are depicted in the diagram above. (a) Use supply and demand analysis to describe the impact of a per-unit tax on each of the following.

P of cigarettes P S S Increase in per-unit tax for cigarettes D Q of cigarettes (i) The price paid by consumers for cigarettes An increase of a tax is an increase in the cost of doing business. Supply shifts to the left causing the price to go up.

P of cigarettes S S Increase in per-unit tax for cigarettes D Q of cigarettes (ii) The quantity of cigarettes sold The decrease in supply causes the quantity of cigarettes sold to decrease.

D Q of cigarettes P of cigarettes S S D D Q of cigarettes (b) If the demand for cigarettes becomes more elastic, explain how each of the following will differ from part (a). (i) The price and quantity sold

D Q of cigarettes P of cigarettes S S D D Q of cigarettes (b) If the demand for cigarettes becomes more elastic, explain how each of the following will differ from part (a). (i) The price and quantity sold The price will not go up by as much. The Q will go down by more.

D Q of cigarettes P of cigarettes S S D D Q of cigarettes (b) If the demand for cigarettes becomes more elastic, explain how each of the following will differ from part (a). (ii) The governmentâ€™s tax revenues Since the percent change in Qd is greater than the percent change in P, the government revenues will decrease.

P of cigarettes S S 5 4 D D 3 5 Q of cigarettes At the original price of \$4 and quantity of 5, the total revenue is \$20 (\$4 x 5). As the price increases and quantity decreases because of the tax, the total revenue goes down to \$15 (\$5 x 3).