QUESTION 9 Cigarettes have a very inelastic demand. Ice...

QUESTION 9 Cigarettes have a very inelastic demand. Ice cream has an elastic demand. If a $1 per unit tax/unit was imposed on each of these goods (holding everything else constant), which consumers would have the higher tax incidence? There would be no difference in tax incidence between ice cream and cigarette consumers. The ice cream consumers would have the higher tax incidence. The cigarette consumers would have the higher tax incidence. More information is needed to determine who would have the higher tax incidence.

Transcript

00:01 So here we're talking about elasticity, and let's start off by drawing this demand here.

00:04 Right.

00:05 We have quantity and price.

00:08 We know that the price is going from nine to six, right? and the quantity at six is 200 ,000.

00:18 So i'll put 200 there.

00:20 And at 9, the quantity is 140.

00:24 So 140.

00:26 These are the two points we observe.

00:28 And that means that our demand curve looks something like that, right? going through those two points.

00:35 Elasticity for b is equal to the percentage change in quantity over the percentage change in price, right? and usually this uses the midpoints as the base for the the percentage changes, right? it's not clear, right? if we're going from six to nine, nine to six, we want that to be symmetrical and not depend on the frame of reference.

00:58 So the percent change in quantity would be we are going from 200 minus 140 all over 170 so that's 60 over 170 the percent change in price means that we are going from um six to nine and relative to the midpoint of 7 .5 so this is minus three over 7 .5 this means that the elasticity is going to be i'm just going to slam these into the calculator, right? notice that it's got to be negative because it's a demand curve.

01:35 It's downward sloping.

01:36 We should expect a negative relationship between these two variables.

01:40 I get an elasticity here of minus 0 .882...

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