Economics-Microeconomics question.

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 Q1. In order to reduce teen smoking, the government places a $2 per pack tax on cigarettes. After one month, while the price to

 the consumer has increased a great deal, the quantity demanded for cigarettes has been reduced only slightly.

a.   Is the demand for cigarette over the period of one month elastic or inelastic?  Briefly explain.  

b.  Suppose you are in charge of pricing for a tobacco firm.  The President of your firm suggests that the evidence received over the last month demonstrates that the cigarette industry should get together and raise the price of cigarettes further because total revenue to the tobacco industry will certainly rise.  Is the president of your firm correct?  Why? 

c.   Suppose the president of your tobacco firm suggests that your firm should raise the price of your cigarettes independent of the other tobacco firms because the evidence clearly shows that smokers are insensitive to changes in the price of cigarettes.  Is the president of your firm correct if he wants to maximize total revenue?  Explain briefly. 


Q2. For each of the following situations, decide whether the bundle Tom is considering optimal or not.  If it is not optimal, how could he improve his overall level of utility?  That is, determine which good he should spend more on and which good should he spend less on.

  1. Tom has $200 to spend on sneakers and sweaters.  Sneakers cost $50 per pair, and sweaters cost $20 each.  He is thinking about buying 2 pairs of sneakers and 5 sweaters.  He tells his friend that the additional utility he would get from the second pair of sneakers is the same as the additional utility he would get from the fifth sweater. 
  2. Tom has $5 to spend on pens and pencils.  Each pen costs $0.5 and each pencil costs $0.10.  He is thinking about buying 6 pens and 20 pencils.  The last pen would add five times as much to his total utility as the last pencil. 

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