Question

Upper Slobbovians smoke 10 million cigarettes per year, so do Lower Slobbovians. To discourage smoking, each country imposes an excise tax of 50c per pack. As a result, the price of cigarettes rises by 35c per pack in Upper Slobbovia, but by only 15c per pack in Lower Slobbovia. True or False: The Upper Slobbovian excise tax discourages smoking more effectively (that is, it leads to a bigger decrease in 16.

Answer 1

The effect of the excise tax to cut the cigarette consumption depends on the elasticity of the demand curve. If the demand of upper slobbovians is more elastic than the demand of lower slobbovians then excise tax will be more effective in upper slobbovians. Price is increased more in upper slobbovians, it decreases demand for cigarette more in this area as demand is more elastic. In that case, the upper slobbovian excise tax discourages smoking more effectively.

If the demand of upper slobbovian is perfectly inelastic then change in price will have no effect on demand. and demand for lower slobbovian is elastic In that case, the excise tax is ineffective in upper slobbovian.

So the given statement is uncertain.