d. the good is more of a 62. Refer to the table below to answer the question. A local government is looking to reduce "undesirable" behavior on the part of its citizens: drinking alcoholic beverages and smoking. A 10\% sin tax would have the largest proportionate effect on the sale of: Good Elasticity Cigarettes .3 Liquor .5 Wine .4 Beer .1 A) Cigarettes B) Liquor C) Beer D) Wine
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For cigarettes: 0.3 * 10% = 3% For liquor: 0.5 * 10% = 5% For wine: 0.4 * 10% = 4% For beer: 0.1 * 10% = 1% Show more…
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(a) If the government wants to maximize revenue from cigarette tax, should it simply set a very high tax rate on cigarettes? (b) If the government achieves its objective, what is the elasticity of demand for cigarettes at the price corresponding to this tax rate? You may assume that cigarettes are essentially free to produce and the entire price reflects the tax. (c) A research company measures elasticity and concludes that the demand for cigarettes is price-elastic. Should the government raise or lower the tax rate? (d) If the government wants to get some tax revenue but also wants to make people smoke less, should it set a tax rate above or below that which maximizes revenue from cigarette taxation?
Among the tax proposals regularly considered by Congress is an additional tax on distilled liquors. The tax would not apply to beer. The price elasticity of supply of liquor is $4.0,$ and the price elasticity of demand is $-0.2 .$ The cross-elasticity of demand for beer with respect to the price of liquor is 0.1 a. If the new tax is imposed, who will bear the greater burden-liquor suppliers or liquor consumers? Why? b. Assuming that beer supply is infinitely elastic, how will the new tax affect the beer market?
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New York City has the highest cigarette taxes in the country. During the four months following the recent tax hike, sales of taxed cigarettes in the city fell by more than 50 percent as consumers turned to the city's bustling black market. The thriving illegal market for cigarettes has diverted billions of dollars from legitimate businesses and governments to criminals. Source: Cato Institute, February 6,2003 a. How has the market for cigarettes in New York City responded to the high cigarette taxes? b. How does the emergence of a black market impact the elasticity of demand in a legal market? c. Why might an increase in the tax rate actually cause a decrease in the tax revenue?
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