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Effective or less effective in reducing tobacco consumption
- Suppose that the government decides Australians should reduce the consumption of tobacco and, therefore, it imposes a tax on tobacco products.
a. Should this tax be imposed on producers or consumers? Explain using both words and a diagram.
b. If the demand for tobacco becomes more elastic, will this tax be more effective or less effective in reducing tobacco consumption? (Hint: Draw two diagrams, side by side, with the same supply curve and different demand curves.)
c. If the government also wants to maximise the tax revenue, should it impose taxes on tobacco products with high demand elasticity or low elasticity? Explain.
[6+6+6 = 18 marks] - We have demand equation: P = 6-Q and supply equation: P = Q.
a. Calculate the equilibrium price, equilibrium quantity and the total surplus.
b. Suppose government imposes a per-unit tax of $1 on producers. Derive the new supply curve and calculate the new equilibrium price and quantity. Is there any dead weight loss?
c. Now suppose demand becomes more elastic and we have a new demand equation P=4-Q/3. How much is the deadweight loss from a tax of $1 per unit sold? Is the deadweight loss greater or smaller than that in question (b)? Why?
[6+6+6 = 18 marks] - Using the AS/AD model, discuss the likely short-run and long-run impacts of the following events with proper diagram(s), assuming that the government takes no further action:
a. A sudden health crisis (such as the coronavirus pandemic in the first half of 2020) that lowers workers’ income (starting from the full-employment level).
b. An income tax cut by the government to support the economy (starting from the full-employment level).
[9+9=18 marks]
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