Question 1

You are an adviser to the mayor in a city with 1.5 million residents who smoke cigarettes.

Cigarettes currently cost $1.50 per pack, including a $0.30 tax. The average smoker buys

100 packs a year, generating total spending of about $225 million dollars a year, of which

$45 million is tax revenue.

Lobbyists advocate raising cigarette taxes by 100% to 60 cents per pack. They say that this will simultaneously :

1. raise an additional $45 million in tax revenue, for a total of $90 million in tax revenue which would balance the city’s budget

and

(2) cut the number of smokers by 50%, which would improve public health

Part A: The mayor has asked you to evaluate the lobbyists’ claims and provide your own assessment of and predictions about the proposal. In a few sentences (4-6 max), discuss the validity of the lobbyists’ claims.

Part B: After much deliberation, the government decides to increase the tax from $0.30 to $0.40 per pack. Do you think that this higher tax have a larger effect on smoking one year from now or five years from now (assuming that the tax increase is permanent)?

Explain your answer.

Part C: Studies have found that teenagers have higher price elasticity of demand for cigarettes than do adults. Why might this be true?

Question 2

In order to improve the health of US citizens, a Senator proposes a subsidy on fresh

produce (not just broccoli).

Part A: In words (without a diagram), discuss the effects on equilibrium price and quantity.

Part B: Now, use a detailed diagram and words to show the effects of the subsidy. (Use the diagrams from the lecture notes as examples of how to label your diagrams.) What is the new equilibrium? What is the effect of the subsidy on consumer surplus, producer surplus, and total surplus? What is total government expenditure? Make sure to describe the components of the changes to consumer surplus and producer surplus in words (see lectures notes for guidance).

Price: $11.16

Solution: The downloadable solution consists of 4 pages, 716 words and 2 charts.
Deliverable: Word Document