Question - The government taxes packs of cigarettes both to discourage smoking and to raise tax revenue. The average excise tax on a pack of cigarettes is $2.50 per pack. The table below presents the annual demand and supply schedules, in billions of packs, both before and after the tax on packs of cigarettes.
|
Market for Cigarettes
|
|
Price (dollars per pack)
|
Quantity of Cigarettes Demanded (billions of packs)
|
Quantity of Cigarettes Supplied (billions of packs)
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Quantity of Cigarettes Supplied with Tax (billions of packs)
|
|
$10.00
|
5.0
|
65.0
|
40.0
|
|
9.75
|
7.5
|
62.5
|
37.5
|
|
9.50
|
10.0
|
60.0
|
35.0
|
|
9.25
|
12.5
|
57.5
|
32.5
|
|
9.00
|
15.0
|
55.0
|
30.0
|
|
8.75
|
17.5
|
52.5
|
27.5
|
|
8.50
|
20.0
|
50.0
|
25.0
|
|
8.25
|
22.5
|
47.5
|
22.5
|
|
8.00
|
25.0
|
45.0
|
20.0
|
|
7.75
|
27.5
|
42.5
|
17.5
|
|
7.50
|
30.0
|
40.0
|
15.0
|
|
7.25
|
32.5
|
37.5
|
12.5
|
|
7.00
|
35.0
|
35.0
|
10.0
|
|
6.75
|
37.5
|
32.5
|
|
|
6.50
|
40.0
|
30.0
|
|
|
6.25
|
42.5
|
27.5
|
|
|
6.00
|
45.0
|
25.0
|
|
|
5.75
|
47.5
|
22.5
|
|
|
5.50
|
50.0
|
20.0
|
|
|
5.25
|
52.5
|
17.5
|
|
|
5.00
|
55.0
|
15.0
|
|
|
4.75
|
57.5
|
12.5
|
|
|
4.50
|
60.0
|
10.0
|
|
a. What is the equilibrium quantity and price per pack of cigarettes if there is no excise tax on cigarettes?
35 billion packs; $7.00 per pack
22.5 billion packs; $8.00 per pack
22.5 billion packs; $7.00 per pack
35 billion packs; $8.00 per pack
b. What is the equilibrium quantity and price per pack of cigarettes if there is a $2.50 excise tax per pack on cigarettes?
35 billion packs; $8.25 per pack
22.5 billion packs; $8.25 per pack
35 billion packs; $7.00 per pack
22.5 billion packs; $7.00 per pack