a. Suppose the demand for cigarettes in North Texarkana is perfectly inelastic, and the equilibrium quantity demanded is three thousand packs. Draw the new supply curve after the tax on cigarettes has been imposed. Price of Cigarettes (in dollars) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0 Market for Cigarettes in North Texarkana Demand 1 2 3 5 6 Packs of Cigarettes (in thousands) Supply + Tax Supply 7 8 9 10

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
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Chapter1: Making Economics Decisions
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Taxes - End of Chapter Problem
In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of
North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of
South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $2.00.
Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $3.50 per
pack. (This includes the cost of time, gasoline, and so on.) Assume that the tax is levied on the supplier.
a. Suppose the demand for cigarettes in North Texarkana is
perfectly inelastic, and the equilibrium quantity demanded is
three thousand packs. Draw the new supply curve after the tax
on cigarettes has been imposed.
Price of Cigarettes (in dollars)
5.0
c. At what price would someone be just indifferent between
buying a pack in North Texarkana and smuggling a pack from
South Texarkana?
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0
Market for Cigarettes in North Texarkana
Demand
Supply + Tax
b. Is it cost effective to smuggle a pack of cigarettes from South Texarkana?
1
7
2 3 4 5 6
Packs of Cigarettes (in thousands)
Supply
9
Yes, because the cost of smuggling a pack of cigarettes is lower than the new equilibrium price in North Texarkana
Yes, because the cost of smuggling a pack of cigarettes is higher than the new equilibrium price in North Texarkana
No, because the cost of smuggling a pack of cigarettes is lower than the new equilibrium price in North Texarkana
No, because the cost of smuggling a pack of cigarettes is higher than the new equilibrium price in North Texarkana
10
Transcribed Image Text:Taxes - End of Chapter Problem In the United States, each state government can impose its own excise tax on the sale of cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of $2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of cigarettes is $2.00. Assume that the total cost to a resident of North Texarkana to smuggle a pack of cigarettes from South Texarkana is $3.50 per pack. (This includes the cost of time, gasoline, and so on.) Assume that the tax is levied on the supplier. a. Suppose the demand for cigarettes in North Texarkana is perfectly inelastic, and the equilibrium quantity demanded is three thousand packs. Draw the new supply curve after the tax on cigarettes has been imposed. Price of Cigarettes (in dollars) 5.0 c. At what price would someone be just indifferent between buying a pack in North Texarkana and smuggling a pack from South Texarkana? 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0 Market for Cigarettes in North Texarkana Demand Supply + Tax b. Is it cost effective to smuggle a pack of cigarettes from South Texarkana? 1 7 2 3 4 5 6 Packs of Cigarettes (in thousands) Supply 9 Yes, because the cost of smuggling a pack of cigarettes is lower than the new equilibrium price in North Texarkana Yes, because the cost of smuggling a pack of cigarettes is higher than the new equilibrium price in North Texarkana No, because the cost of smuggling a pack of cigarettes is lower than the new equilibrium price in North Texarkana No, because the cost of smuggling a pack of cigarettes is higher than the new equilibrium price in North Texarkana 10
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