The Centers for Disease Control and Prevention (CDC) estimates that cigarette smoking causes more than 480,000 deaths eachyear in the United States. Cigarette smoking also carries a significant financial burden, with an estimated $170 billion of directmedical expenses and another $156 billion lost from lower worker productivity annually.Suppose the market demand and supply for cigarettes in the U.S. is represented in the accompanying graph.a. Place point A on the initial equilibrium in the market with no government intervention.Price ($ per pack)1514131 21211109∞76543210040ADemandSupply80 120 160 200 240 280 320 360 400 440 480 520Quantity of cigarettes (billions of packs)b. Suppose the government wants to reduce cigarette consumption to 200 billion packs per year. The government couldachieve this by imposing a per-unit tax on cigarettes ofper pack. c. Suppose that, instead of a per-unit tax, the government imposes a price control on cigarettes. To achieve its goal, it couldper pack or a price floor ofimpose a price ceiling ofper pack.d. Now suppose that, instead of a tax or a price control, the government imposes a quantity restriction, or quota, onproducers. Consumers will end up payingper pack as a result.

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a. Place point A on the initial equilibrium in the market with no government intervention.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The Centers for Disease Control and Prevention (CDC) estimates that cigarette smoking causes more than 480,000 deaths each
year in the United States. Cigarette smoking also carries a significant financial burden, with an estimated $170 billion of direct
medical expenses and another $156 billion lost from lower worker productivity annually.
Suppose the market demand and supply for cigarettes in the U.S. is represented in the accompanying graph.
a. Place point A on the initial equilibrium in the market with no government intervention.
Price ($ per pack)
15
14
13
1 2
12
11
10
9
∞
7
6
5
4
3
2
1
0
0
40
A
Demand
Supply
80 120 160 200 240 280 320 360 400 440 480 520
Quantity of cigarettes (billions of packs)
b. Suppose the government wants to reduce cigarette consumption to 200 billion packs per year. The government could
achieve this by imposing a per-unit tax on cigarettes of
per pack.

c. Suppose that, instead of a per-unit tax, the government imposes a price control on cigarettes. To achieve its goal, it could
per pack or a price floor of
impose a price ceiling of
per pack.
d. Now suppose that, instead of a tax or a price control, the government imposes a quantity restriction, or quota, on
producers. Consumers will end up paying
per pack as a result.

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