Carton-tax relative to the absence of the tax

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Reference no: EM131385576

The demand for cartons of cigarettes is Q = 1200 – 10P and the supply of cartons of cigarettes is Q = 20P. Suppose the federal government levies a $10 per-carton-tax on sellers for every carton they sell.

a. What is the statu tory incidence for the $10 per-carton-tax relative to the absence of the tax? What is the economic incidence for the $10 per-carton-tax relative to the absence of the tax? Based on your mathematical solution, graphically summarize only the results that are relevant for the incidence analysis.

b. Conduct efficiency analysis for the $10 per-carton-tax relative to the absence of the tax. Based on your mathematical solution, draw a new graph to graphically summarize only the results that are relevant to the efficiency analysis of the tax.

c. According to your analysis above, how much tax revenue would you expect the federal government to raise?

d. What can you infer about the price elasticity of demand relative to the price elasticity of supply in the market for cigarettes, based on your analysis in parts a and b?

e. Suppose that supply is perfectly elastic. How does your tax incidence analysis (part a) and efficiency analysis (part b) change in the face of a $10 per-carton-tax.

Reference no: EM131385576

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