suppose the state government is considering imposing additional taxes on cigarrettes to crubhealth related problems. Assume there is no interstate trade of cigarettes. manager have been hired by the state government to provide some analysis of the proposed policy.
- Previous studies indicate that the price elasticity of demand for cigarettes is 0.4. If a packet of cigarettes currently costs 8 and the government wants to reduce smoking by 20 percent, by how much should it increase the proce?
- The government also wants to know the long-run effects of the policy. If the tax were made permanent, what would manager advise the government about the effects on smoking rates in one year compared with five years aafter the policy was implemented?