Economics: Impact of Excise Tax, Utility Curve, Production Costs, Market Structures and Pricing Strategies

Running head: ECONOMICS 1
Economics
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ECONOMICS 2
ECONOMICS
1. The Federal Tax Authority cautioned traders not to stock up soft drinks and cigarettes
since they will have to prove payment of tax on stocked goods after excise tax is introduced.
Excise tax will have an impact of increasing the prices of drinks and cigarettes. In regards, with
the specific UAE excise tax situation, the prices increased by 50%.
Traders who stock up their goods before excise duty is implemented are motivated by the
urge to take advantage of the lower prices prior to tax. This implies that such traders might not
purchase stock in the near future and hence will have denied the government of tax revenue.
With the introduction of excise duty, traders will have to hike the prices of drinks and cigarettes
so as to get a profit. Stock up will have an impact of lowering the equilibrium price and
increasing equilibrium quantity from that which could have existed due to introduction of the
tax.
2. The survey was conducted at Happy Grocery stores to establish the impact of the excise
tax effected by the UAE Federal Tax Authority at 1 st October 2017. In the survey, the
enumerators interviewed the selected traders their selling prices of Coca cola 300ml carbonated
drink and the demand of the product before and after the excise duty was effected. From the
study, it was found that Coca-Cola 300 ml retailed at 1.08 Dh before the tax and 1.62 Dh after
the excise tax while the demand declined from an average of 240 Units per day to 200 units. The
price of Chester field red tobacco brand retailed at 2.1 Dh prior and 4.2Dh after the tax while its

ECONOMICS 3
demand remained constant at 200 pieces per day. Monster energy drink also increased from 5.5
Dh to 11 Dh while its demand declined from 400 units to 300 units.
Formula= Percentage change ∈quantity demanded
Percentage change∈ price
Product Price change (%) Demand change (%) Elasticity
Coca cola drink 50 -16.67 -0.333
Monster energy drink 100 -25 -0.25
Chester field red
tobacco
100 0 0
Chester field cigarettes are price inelastic and therefore, despite of the change in price from
2.1Dh to 4.2Dh, the quantity demanded remained constant at 200 pieces @ day. The product is
an addictive product whose consumers purchase regardless of retailing price. Coca-Cola 300 ml
soda is a luxury good with a price elasticity of -0.333. The increase in its price from 1.08Dh to
1.62Dh in response to the excise duty caused a decline in its demand from 240 units to 200 units
per day since consumers could postpone its consumption in favor of necessary goods. Monster
energy drink is also price elastic (+0.25) and hence its price increase from 5.5Dh to 11Dh caused
a decline in the quantity demanded. From the findings, the coca cola brand quantity decreased
most because it has the highest price sensitivity as indicated by the high elasticity of demand of -
0.333 since the product is a luxury good.