Economic Assignment: Taxation, Market Structures, and Municipal Amalgamation

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....................................................................................................................................3
Answer a.................................................................................................................................3
Answer b................................................................................................................................4
Answer 3....................................................................................................................................6
References................................................................................................................................10

2ECONOMIC ASSIGNMENT
Answer 1
The exercise duty on tobacco products on per stick of cigarette is 0.71046(ato.gov.au, 2018).
The before tax price of cigarettes is therefore
$30 – (20*0.71046) = $30- $14.2092 = $15.79
Figure 1: Effect of a tax imposed on tobacco sellers
(Source: as created by Author)
The figure above describes the effect of tax on sellers of tobacco products. In case of
indirect taxation, the burden of tax is divided between buyers and sellers. Sellers can easily
bypass the tax burden on buyers in form of increased price. The extent of the tax burden
however depends on the price elasticity of demand and supply. The price elasticity of demand
is the percentage change in quantity demanded in response to a change in price. The
magnitude of change in demand depends on a number of factor. Nature of the commodity is
one important factor determining the price elasticity of demand (Fine, 2016). For addictive

3ECONOMIC ASSIGNMENT
items like tobacco people tend to reduce their demand less in response to high price. The
demand for tobacco products is thus relatively inelastic in nature (tobaccoinaustralia.org.au,
2018). A relatively inelastic demand implies proportionate change in demand is less than that
of the change in price. The low responsiveness of demand, make the demand curve relatively
steeper.
In the above figure, the demand for tobacco products is represented by the steep
demand curve DD. The supply is shown as SS. Before tax the equilibrium is at E.
Corresponding price is P1 and that of the equilibrium quantity is Q1. Suppose now a tax is
imposed on sellers of tobacco products. Tax generally discourages production. The imposed
tax thus shifts the demand curve to the left. The new equilibrium is set at E1. This is obtained
at the intersection of new supply curve and existing demand curve (Baumol & Blinder, 2015).
At the new equilibrium, price increases to P2 and equilibrium quantity decreases to Q2. The P2
is the tax inclusive price paid by the buyers. Sellers however receives a lower price of P3. The
difference in prices is the amount of tax. As clearly evident from the diagram, buyers now
have to pay a much higher price as compared to equilibrium price. Because of the relatively
inelastic nature of demand, buyers bear a higher tax burden than that sellers do.
Answer 2
Answer a
Q TC TFC TVC ATC AFC AVC MC
0 50 50 0
1 100 50 50 100.00 50.00 50.00 50
2 140 50 90 70.00 25.00 45.00 40
3 170 50 120 56.67 16.67 40.00 30
4 190 50 140 47.50 12.50 35.00 20
5 210 50 160 42.00 10.00 32.00 20
6 230 50 180 38.33 8.33 30.00 20
7 260 50 210 37.14 7.14 30.00 30
8 300 50 250 37.50 6.25 31.25 40