Reference no: EM131536472

In the News: Professor Becker Corrects President's Math

President Clinton has seized upon the cigarette excise tax as an expedient and politically correct means of increasing federal revenue. In 1994 the federal government took in $12 billion from the present 24-cents-per-pack tax. If the tax were quadrupled to $1 a pack, Clinton figures tax revenues would increase by more than $50 billion over three years. Those added revenues would help finance the health care reforms the president so dearly wants.

Professor Gary Becker, a Nobel Prize-winning economist at the University of Chicago, says Clinton's math is wrong. The White House assumed that cigarette sales would drop by 4 percent for every 10 percent increase in price. Professor Becker says that reflects only the first-year response to higher prices, not the full adjustment of smokers' behavior. Over a three-year period, cigarette consumption is likely to decline by 8 percent for every 10 percent increase in price-twice as much as Clinton assumed. As a result, the $1-a-pack tax will bring in much less revenue than President Clinton projected.

Source: Gary S. Becker, "Warning: A Higher Cigarette Tax May Be Hazardous to Health Financing," BusinessWeek, August 15, 1994, p. 18. 

According to Professor Becker, by how much would cigarette prices have to rise to get a 15 percent reduction in smoking in

Instructions: Enter your response as a percentage and to one decimal place.

(a) One year?

percent

Instructions: Enter your response as a percentage and two decimal places.

(b) Three years?

percent