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Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author note

1ECONOMIC ASSIGNMENT
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................4
Answer a.................................................................................................................................4
Answer b................................................................................................................................5
Answer 3....................................................................................................................................7
References................................................................................................................................11

2ECONOMIC ASSIGNMENT
Answer 1
As of March 1, 2018 the effective exercise tax of 0.71046 per sticks of cigarette (ato.gov.au,
2018).
Total tax paid on standard packet of 20 cigarette is (20*$0.71046) = $14.2092.
The before tax price is ($30 - $14.2092) = $15.79.
Excessive consumption of tobacco items causes severe health hazards adding to an
increases in health expenditure. In order to reduce the consumption to tobacco products
Australian government imposes exercise tax on tobacco products to a considerably high level.
Exercise tax is a kind of indirect tax. In contrast to direct taxes, the incidence of taxes here
can be shifted from sellers to buyers. The burden of tax thus shared between both the groups.
In the tax incidence, an important role is played by the concept of elasticity. Price elasticity of
demand is an indicator of responsiveness of demand with respect to price. The most
important determinant of demand is price. Increase in price causes a reduction in demand.
However, extent of the demand change depends on the concerned price elasticity of demand.
Price elasticity of demand stands to capture magnitude of change in demand as a result of
change in prices. Based on the relative change in demand with respect to a change in price
elasticity is classified in several categories (Maurice & Thomas, 2015). Commodities for
which change in demand is relatively higher than the change in price is said to have a
relatively elastic demand. In this case, a small change in price causes a much greater change
in demand. The estimated price elasticity of demand for these types of commodity is greater
than 1. In case of relatively elastic demand, the proportionate change in demand is less than
the proportionate change in price. This yields a price elasticity measure less than one. Several
factor influences the elasticity the demand. Nature of commodity is one important factor
affecting demand elasticity. Addictive items like tobacco tends to have a relatively inelastic

3ECONOMIC ASSIGNMENT
demand. For these products, people are unwilling to alter their demand in response to price
(tobaccoinaustralia.org.au, 2018). Now, for such product even after imposition of tax people
do not reduce their demand much. As people continue to purchase such products at a high
price most of tax burden is borne by the buyers as compared to the sellers group. The impact
of tax on tobacco products is discussed below using the standard demand supply framework.
Figure 1: Impact of a tax on seller in the tobacco market
(Source: as created by Author)
The upward rising curve SS shows the supply curve for tobacco products. The
downward sloping steep curve represents the demand curve. Without tax, the free market
equilibrium exits at e. P* and Q* are the free market equilibrium price and quantity
respectively. Consider now the effect of imposition of an exercise tax of ‘t’ on seller. The