Economics for Business: Excise Duty on Tobacco, Cost Analysis of a Firm, and Economic Rationale for Merging Local Governments in Australia

Running head: ECONOMICS FOR BUISNESS
Economics for business
Name of the student
Name of the university
Author Note

1ECONOMICS FOR BUISNESS
Table of Contents
Answer1:....................................................................................................................................2
Answer 2:...................................................................................................................................5
a).............................................................................................................................................5
b)............................................................................................................................................6
Answer 3:...................................................................................................................................8
References:...............................................................................................................................10

2ECONOMICS FOR BUISNESS
Answer1:
According to the rules of Australian government, excise rate has increased by 12.5%
on the standard 20 Packet of cigarettes, as at 1st January 2018 (Health.gov.au, 2018).
The given price of standard packet of cigarettes is $30 including excise tax rate.
Hence, the before tax price of this packet can be considered as $X. Thus, after imposition
of tax worth 12.5%, the total price is $ (X+ 12.5% of X) which is equal to $30. Hence, by
forming an equation, the value of X can be determined.
(X+ 12.5% of X) = 30
 X + (X/8) = 30
 8X + X = 30 * 8
 9X = 240
 X = 240/9
 X = 26.67
Therefore, the value of before-tax price is $ 26.67.
As the government has imposed excise duty on tobacco, the production cost of this
specified product has increased significantly. Consequently, sellers can decrease their
amount of tobacco supply in the market due to this higher cost (Lloyd, 2017). With the
help of demand and supply concept, this phenomenon can be described.

3ECONOMICS FOR BUISNESS
Price of tobacco
O Quantity of tobacco
S0
S1
D
P1
P0
Q1 Q0
Figure 1: Impact of excise duty on Tobacco supply
Source: (created by author)
Figure 1 has represented the demand and supply curve of tobacco. Before the
government has imposed excise duty, initial market supply curve has remained at S0
position while, the market demand curve has remained at D. By equating these curves,
equilibrium amount of tobacco and its corresponding level of market price have been
obtained, which are, Q0 and P0, respectively. After imposition of tax, the supply curve
has shifted to the left, from which it can be stated that the seller is intending to supply less
amount of tobacco at the initial price level (Borenstein, Bushnell & Wolak, 2017). Thus,
the new supply curve is S1, while the demand curve has remained at its initial position.
From equating these two curves, new equilibrium amount of output and its corresponding
price can be obtained, which are, Q1 and P1, respectively. Hence, after imposition of tax,
price of tobacco has increased by P0P1, while available amount of this product in market
has decreased by Q1 Q0 unit.