Assume the Supply Curve for Cigars Is a Typical,upward-Sloping Straight

question 11

Multiple Choice

Assume the supply curve for cigars is a typical,upward-sloping straight line,and the demand curve for cigars is a typical,downward-sloping straight line.Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax.Then a tax of $0.50 per cigar is imposed.The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40.The government's tax revenue amounts to $475 per month.Which of the following statements is correct?

• A)The demand for cigars is less elastic than the supply of cigars.
• B)The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50.
• C)The deadweight loss of the tax is $12.50.
• D)All of the above are correct.

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Definitions:

Marginal Analysis

The examination of the benefits and costs of an additional unit of consumption or production, used to make decisions based on the extent of added benefits over added costs.

Lemonade

A sweetened beverage made from lemon juice, water, and sugar, often sold as a refreshment during warm weather.

Opportunity Cost

Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.

Cancún

A Mexican city on the Yucatán Peninsula bordering the Caribbean Sea, known for its beaches, resorts, and nightlife.