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Q7) Governor Edwards may be looking for someone who can determine the revenue which can be...

Q7) Governor Edwards may be looking for someone who can determine the revenue which can be generated by raising the cigarette tax from 86 cents per pack to $1.08 per pack. Calculate the increase in state tax revenue that would be generated by this increase. Q8) Assume that price of X is 6, and quantity demand for X is 500. Price of Y is 10 and quantity demanded for Y is 20. When the price of X goes up to 8, quantity demanded for X goes down to 400, and quantity demanded for Y goes up to 22. Find all relevant elasticities

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Answer #1

7. Tax rate has increased to 1.08 per pack. This means tax revenue is $1.08 per pack.

8. Percentage change in the quantity demanded of X = 400 - 500 / 500 = -20%

Percentage change in the price of X = 8-6 / 8 = 25%

Percentage change in quantity demanded of Y = 22- 20 / 20 = 10%

Price elasticity of demand for X = Percentage change in the quantity demanded of X / Percentage change in the price of X

PEDx = 20/25 = - 0.8

Cross elasticity = Percentage change in quantity demanded of Y / Percentage change in the price of X

CE = 10/25 = 0.4

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