Question

1.Governments often claim that they impose high taxes on cigarettes because smoking is bad for your health. They claim that the high taxes are intended to discourage your consumption. Use your understanding of the elasticity of demand to dispute this claim, assuming that cigarettes have a very inelastic demand. Illustrate with a graph. Hint: Very inelastic is not the same as inelastic or perfectly inelastic.

2.Supposing that Canada and China were the only two countries in the world, why would it be impossible for Canada to import a greater value of goods from China than the value we export to China, even if China produced most goods more cheaply than Canada? Use this example to explain why increasing our imports from China can never create unemployment in Canada

Explain these qeustions by typing，please！

Answer 1

1. An inelastic demand is that the buyers doesn’t respond that much to the changes in the price.

As cigarettes are an addiction goods to the people who smokes tend not to react largely on an increase in the price which makes the demand inelastic. As they will smoke even if they have to pay higher price. The demand will not change that much due to of high taxes as it tends to have very inelastic demand where the people will generally purchase for their addiction. As a result,( when the demand is very inelastic) the dead weight loss of a tax is small as the buyers are willing to pay more to smoke for their addiction even knowing to the impact on their health. Thus governments cannot benefit much on imposing high taxes to reduce the consumption of cigarettes.

Deadweight Loss Supply Consumer TaxIncidence Produceir P- Incidence Demand Quantity

2. Imports and exports are always to be paid in foreign currencies. Canada cannot produce Chinese currency and hence for it to import from China, it should export equivalent good to China and earn Chinese currency to be able to use that currency to import goods from China. So it is impossible for Canada to import a greater value of goods from China than the value Canada export to China, even if China produced most goods more cheaply than Canada.

To if Canada increases its imports from China, it has to increase its exports to China too. For producing good for exports, it has to employ people. Greater the imports, greater should be the exports and equivalent number of people have to be employed by Canada. It is not like importing more from China would mean just importing from then, exporting them nothing and hence increasing unemployment in the country