Need help with microeconomics

timer Asked: Oct 21st, 2015

Question description

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?  Explain your reasoning. 

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 your reasoning. 

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