Business, 07.07.2019 04:00 nave1008

Assuming that the price of a pack of cigarettes is $5 before the tax and if the actual price elasticity of demand for california-taxed cigarettes is 0.8, c. by how much will the quantity demanded decrease with the new tax? d. how much additional revenue will the state take in?

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Answer from: monica1670

c. The quantity demanded will decrease by approximately 218 million units to 582 million units.

d. The state will take in $468 million in additional revenues.

We follow these steps to arrive at the answer

Current Price of a cigarette pack with taxes $ 5.87 = 5+0.87

Price of a cigarette pack after an increase in taxes $ 7.87 = 5+2.87

Change in Prices (ΔP) $ 2 = 7.87 - 5.87

Price Elasticity of demand (PED) 0.8

% change in Price $\mathbf{\frac{\Delta P}{P_{0}}*100}$

$\mathbf{\frac{2}{5.87}*100}$

% Change in Price 34.07155%

% Change in quantity demanded

$\mathbf{{% change in price}* PED}}$

$\mathbf{34.07155 * 0.8}$

% change in quantity demanded 27.5724%

Since price of a commodity and the quantity demanded share an inverse relationship, this means that when the price of cigarettes increases by 34.07155%, the demand for cigarettes will fall by 27.25724%.

Current demand for cigarette packs 800 million

Fall in demand for cigarette packs 218.0579216=800*0.2725724

New demand for cigarette packs

581.9420784 = 800-218.0579216

The state will gain from an increase in price by $2, since all of the price increase is due to an increase in taxes. So, the state will take in 2 * 582 = 1164

Previously it used to get 0.87 * 800 = 696

Hence the additional revenues the state will take in is 1164 - 696 = 468

Answer from: YeetMyFeet

The quantity demanded decreased by 27.25%.

The state will get an additional revenue of $974 million.

Further Explanation:

Price Elasticity of Demand: It refers to the measure which represents the change in the demand of quantity of goods when there is a change in price of goods. The elasticity of price can be calculated as :

${\text{Price elasticity of demand = }}\dfrac{{{\text{Percentage change in quantity demanded}}}}{{{\text{Percentage change in price}}}}$

Calculate the decrease in quantity demanded:

The fall in quantity demanded = 800,000,000 × .2725

= 216,000,000 or 218 million

The quantity demanded decreased by 27.25% or 218 million.

Working note 1:

Compute the current price of cigarette pack:

Current Price of a cigarette pack before increase in taxes = $5 + $0.87

= $5 + 0.87

Working note 2:

Compute the price of cigarette pack after increase in taxes:

Price of cigarette pack after increase in taxes = $5 + $2.87

= $7.87

Working note 3:

Compute the change in price of cigarettes:

Change in price = $7.87 - $5.87

= $2

Working note 4:

Compute the percentage change in the price:

$\begin{aligned} {\text{Percentage change in price}} &= \dfrac{{{\text{\$2}}}}{{\$5.87}} \times 100 \\ &= 34.07\% \\ \end{aligned}$

Working note 5:

Calculate the change in quantity demanded:

$\begin{gathered} {\text{Price elasticity of demand = }}\dfrac{{{\text{Percentage change in quantity demanded}}}}{{{\text{Percentage change in price}}}} \\ 0.8 = \dfrac{{{\text{Percentage change in quantity demanded}}}}{{34.07\% }} \\ {\text{Percentage change in quantity demanded = 27}}{\text{.256\% }} \\ \end{gathered}$

Calculate the additional revenue to be taken by state:

The state will earn $2 per cigarettes pack as the tax has increased from $0.87 to $2.87 and the demand has fallen from 800 million to 582 million .

Additional revenue = Increase in revenue – Decrease in revenue due to fall in demand

= ($2 × 582 million) – (218 × $0.87)

= $974 million

The state will get an additional revenue of $ 974 million by imposing a higher tax of $2.87.

Learn more:

1.Demand and type of goods

2.Demand and supply of goods

3. Elasticity of demand

Answer details:

Grade: Middle School

Subject: Economics

Chapter: Elasticity of demand

Keywords: Elasticity of demand, quantity demanded, Price elasticity of demand, the state will get additional revenue, , California taxed cigarettes, assuming that the price of a pack, actual price elasticity of demand.

Answer from: Quest

a dunce cap for you, you assed this 2 weeks ago

Answer from: Quest

Ithink its 3! hope it : -)

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Assuming that the price of a pack of cigarettes is $5 before the tax and if the actual price elastic...