The tax-inclusive price of a carton of cigarettes in Canada is $100 per carton. Per capita...
The tax-inclusive price of a carton of cigarettes in Canada is $100 per carton. Per capita consumption is 10 cartons. Federal and provincial taxes are currently $50 per carton.
Suppose the two levels of government wish to increase the cigarette tax by 20 percent. If the price elasticity of demand is -0.25, what is the additional per capita tax revenue that the two levels of government can expect to collect?
Homework Answers
In the initial situation
Per capita consumption=Q1=10 cartons
Price per carton=P1=$100
Tax per carton=T1=$50
Basic Price per carton=B=P1-T1=100-50=$50
Per capita tax revenue=TR1=Q1*T1=10*50=$500
In the revised situation
Tax per carton=T2=$50*(1+20%)=$60
Price per carton=P2=B+T2=50+60=$110
Percent change in price=(110-100)/105=10%
Percent change in quantity demanded=Price elasticity of demand*Change in price=-0.25*10%=-2.5%
Per capita consumption=Q2=Q1*(1+Change in quantity demanded)= 10*(1-2.5%)=9.75 cartons
Per capita tax revenue=TR2=Q2*T2=9.75*60=$585
Additional per capita tax revenue=TR2-TR1=585-500=$85
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