Recently the governor of Vermont proposed that cigarette taxes in Vermont should be increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can raise $20 million in revenue from this tax hike
He also pointed out that the neighboring state of New Hampshire was considering an increase in cigarette taxes. a. How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a higher tax will increase cigarette prices and thereby decrease the quantity demanded? b. If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still raise $20 million in tax revenue? Why or why not? Explain
a. The governor knows that cigarettes have an inelastic demand. If the price of cigarettes increases because of a tax, smokers will not decrease their consumption of cigarettes substantially. The percentage change in the quantity will be less than the percentage change in the price and the total tax revenue will increase.
b. If New Hampshire does not increase its taxes, it is less likely that Vermont will be able to raise the $20 million in tax revenue. The reason is because for many people cigarettes from New Hampshire are a good substitute for cigarettes from Vermont. Thus many people from Vermont will buy their cigarettes in New Hampshire, thereby decreasing the total increase in tax revenue in Vermont.
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Answer the next question on the basis of the following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10%. If the price of this bond falls by $200, the interest rate will
A. fall by 2.5 percentage points. B. fall by 5 percentage points. C. rise by 5 percentage points. D. rise by 2.5 percentage points.
When the supply of workers is plentiful, one would predict that market wages would be
a. determined outside the domain of economic theory. b. determined solely by factors that affect demand. c. low, other things equal. d. high, other things equal.
Kodak introduced to the marketplace a digital camera that uses no film but that takes photos that can be shown on personal computers. This is an example of:
A. economies of scale. B. product innovation. C. process innovation. D. venture capital.
Your roommate Hansen argues that American producers cannot compete with foreign producers because wages are lower in foreign countries than in the United States. Hansen
A) is incorrect. Free trade raises living standards by increasing economic efficiency. B) is right in asserting the need to protect high wages if the United States wishes to maintain its high standard of living. C) is correct in arguing that the high wages of U.S. workers make it impossible to compete with workers in low-wage countries. D) is advancing the anti-dumping argument for protectionism.