1.Suppose the U.S. Congress is considering passing an excise tax that would increase the
price of a pack of cigarettes by $1.00. What would be the likely effect of this change on the
demand and supply of cigarettes? What is likely to happen to cigarette prices and the
quantity consumed if the tax bill is enacted?
In the short run, the supply of cigarettes would decrease because of the exercise tax. This
would happen because of the increase in cost of production. The decrease of supply then
increases the price of cigarettes as well as decreases the quantity of cigarettes bought.
However the demand wouldn’t be affected but the quantity demanded would decrease.
2. Explain how each of four different factors can affect the price elasticity of demand. Give
an example for each determinant.
The first factor that can affect the price elasticity of demand is the number of substitutes
one product has. So the larger the number of substitutes, the greater the elasticity of
demand will be for that product. An example is Safeway gas being more expensive then
people will go to the many other gas stations around town to get a better price.
Another factor is time. The greater amount of time, the greater the elasticity of demand. In
the short run firms will only be able to increase the input of labor to increase supply and