Chapter 9R, Problem 8MCQ

To determine

The total surplus and the price which is received by producers without including tax if the government levied a tax of $ 0.50 on buying cigarettes where the price elasticity of demand is 1.2 and the price elasticity of supply is 0.7

Explanation of Solution

The total surplus will decrease and the price received by producers without including the tax will also decline by less than $0.50 because tax on the commodity increase the price of goods which in turn decreases quantity demanded. Moreover, the response of the market will be averse to the change in price or increase in tax. And, without considering tax, the price received by producers would fall by less than $0.50 because the tax is $0.50 per pack.

Therefore, the correct option is d.

Economics Concept Introduction

Introduction:

Any excess in production, earning, or the supply of goods is called surplus which is more than the need.