1. 1994
Microeconomics
Question 3

2. 2. The demand and supply curves of cigarettes
P of cigarettes D
Q of cigarettes
2. The demand and supply curves of cigarettes
are depicted in the diagram above.
(a) Use supply and demand analysis to
describe the impact of a per-unit tax on
each of the following.

3. (i) The price paid by consumers for cigarettes
Increase in per-unit
tax for cigarettes
P of cigarettes D
Q of cigarettes
(i) The price paid by consumers for
cigarettes
An increase of a tax is an increase in the cost
of doing business. Supply shifts to the left
causing the price to go up.

4. (ii) The quantity of cigarettes sold
P of cigarettes
Increase in per-unit
tax for cigarettes D
Q of cigarettes
(ii) The quantity of cigarettes sold
The decrease in supply causes the quantity
of cigarettes sold to decrease.

5. (b) If the demand for cigarettes becomes more
P of cigarettes
P of cigarettes D D D
Q of cigarettes
Q of cigarettes
(b) If the demand for cigarettes becomes more
elastic, explain how each of the following
will differ from part (a).
(i) The price and quantity sold

6. (b) If the demand for cigarettes becomes more
P of cigarettes
P of cigarettes D D D
Q of cigarettes
Q of cigarettes
(b) If the demand for cigarettes becomes more
elastic, explain how each of the following
will differ from part (a).
(i) The price and quantity sold
The price will not go up by as much.
The Q will go down by more.

7. (ii) The government’s tax revenues
P of cigarettes
P of cigarettes D D D
Q of cigarettes
Q of cigarettes
(b) If the demand for cigarettes becomes more elastic, explain how each of the following will differ from part (a).
(ii) The government’s tax revenues
Since the percent change in Qd is greater
than the percent change in P, the government
revenues will decrease.

8. At the original price of $4 and quantity of 5, S S 5
P of cigarettes 4 D D 3 5
Q of cigarettes
At the original price of $4 and quantity of 5,
the total revenue is $20 ($4 x 5).
As the price increases and quantity decreases
because of the tax, the total revenue goes
down to $15 ($5 x 3).