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the tax increase, the number of gonorrhea cases was 7,450. Use the midpoint method to
determine the percent decrease in gonorrhea cases, and then calculate the cross-price
elasticity of demand between alcohol and the incidence of gonorrhea. According to your
estimate of this cross-price elasticity of demand, are alcohol and gonorrhea complements or
substitutes?
Solution 10
Question 11
11. The U.S. government is considering reducing the amount of carbon dioxide that firms are
allowed to produce by issuing a limited number of tradable allowances for carbon dioxide
(CO2) emissions. In a recent report, the U.S. Congressional Budget Office (CBO) argues that
“most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who
would face persistently higher prices for products such as electricity and gasoline . . . poorer
households would bear a larger burden relative to their income than wealthier households
would.” What assumption about one of the elasticities you learned about in this section has
to be true for poorer households to be disproportionately affected?
Solution 11
Question 12
12. According to data from the U.S. Department of Energy, sales of the fuel-efficient Toyota
Prius hybrid fell from 194,108 vehicles sold in 2014 to 180,603 in 2015. Over the same
period, according to data from the U.S. Energy Information Administration, the average
price of regular gasoline fell from $3.36 to $2.43 per gallon. Using the midpoint method,
calculate the cross-price elasticity of demand between Toyota Prii (the official plural of
“Prius” is “Prii”) and regular gasoline. According to your estimate of the cross-price
elasticity, are the two goods complements or substitutes? Does your answer make sense?
Solution 12
Question 13
13. The United States imposes an excise tax on the sale of domestic airline tickets. Let’s assume
that in 2015 the total excise tax was $6.10 per airline ticket (consisting of the $3.60 flight
segment tax plus the $2.50 September 11 fee). According to data from the Bureau of
Transportation Statistics, in 2015, 643 million passengers traveled on domestic airline trips at
an average price of $380 per trip. The accompanying table shows the supply and demand
schedules for airline trips. The quantity demanded at the average price of $380 is actual data;
the rest is hypothetical.
Price of trip
Quantity of trips
demanded
(millions)
Quantity of trips
supplied (millions)
$380.02
642
699
380.00
643
698
378.00
693
693
373.90
793
643
373.82
913
642
a. What is the government tax revenue in 2015 from the excise tax?
b. On January 1, 2016, the total excise tax increased to $6.20 per ticket. What is the
equilibrium quantity of tickets transacted now? What is the average ticket price now? What
is the 2016 government tax revenue?
c. Does this increase in the excise tax increase or decrease government tax revenue?
Solution 13
Question 14
14. All states impose excise taxes on gasoline. According to data from the Federal Highway
Administration, the state of California imposes an excise tax of $0.40 per gallon of gasoline.
In 2015, gasoline sales in California totaled 14.6 billion gallons. What was California’s tax
revenue from the gasoline excise tax? If California doubled the excise tax, would tax revenue
double? Why or why not?
Solution 14
Question 15
15. In the United States, each state government can impose its own excise tax on the sale of
cigarettes. Suppose that in the state of North Texarkana, the state government imposes a tax of
$2.00 per pack sold within the state. In contrast, the neighboring state of South Texarkana
imposes no excise tax on cigarettes. Assume that in both states the pre-tax price of a pack of
cigarettes is $1.00. Assume that the total cost to a resident of North Texarkana to smuggle a
pack of cigarettes from South Texarkana is $1.85 per pack. (This includes the cost of time,
gasoline, and so on.) Assume that the supply curve for cigarettes is neither perfectly elastic
nor perfectly inelastic.
a. Draw a diagram of the supply and demand curves for cigarettes in North Texarkana
showing a situation in which it makes economic sense for a North Texarkanan to smuggle a
pack of cigarettes from South Texarkana to North Texarkana. Explain your diagram.
b. Draw a corresponding diagram showing a situation in which it does not make economic
sense for a North Texarkanan to smuggle a pack of cigarettes from South Texarkana to
North Texarkana. Explain your diagram.
c. Suppose the demand for cigarettes in North Texarkana is perfectly inelastic. Draw a
corresponding diagram to illustrate how high the cost of smuggling a pack of cigarettes
could go until a North Texarkanan no longer found it profitable to smuggle. Explain your
diagram.
d. Still assume that demand for cigarettes in North Texarkana is perfectly inelastic and that all
smokers in North Texarkana are smuggling their cigarettes at a cost of $1.85 per pack, so
no tax is paid. Is there any inefficiency in this situation? If so, how much per pack?
Suppose chip-embedded cigarette packaging makes it impossible to smuggle cigarettes
across the state border. Is there any inefficiency in this situation? If so, how much per
pack?
Solution 15
Question 16
16. In each of the following cases involving taxes, explain: (i) whether the incidence of the tax
falls more heavily on consumers or producers, (ii) why government revenue raised from the
tax is not a good indicator of the true cost of the tax, and (iii) how deadweight loss arises as a
result of the tax.
a. The government imposes an excise tax on the sale of all college textbooks. Before the tax
was imposed, 1 million textbooks were sold every year at a price of $50. After the tax is
imposed, 600,000 books are sold yearly; students pay $55 per book, $30 of which
publishers receive.
b. The government imposes an excise tax on the sale of all airline tickets. Before the tax was
imposed, 3 million airline tickets were sold every year at a price of $500. After the tax is
imposed, 1.5 million tickets are sold yearly; travelers pay $550 per ticket, $450 of which
the airlines receive.
c. The government imposes an excise tax on the sale of all toothbrushes. Before the tax, 2
million toothbrushes were sold every year at a price of $1.50. After the tax is imposed,
800,000 toothbrushes are sold every year; consumers pay $2 per toothbrush, $1.25 of
which producers receive.
Solution 16
16.
Question 17
17. Consider the original market for pizza in Collegetown, illustrated in the accompanying table.
Collegetown officials decide to impose an excise tax on pizza of $4 per pizza.
Price of pizza
Quantity of
pizza
demanded
Quantity of pizza
supplied
$10
0
6
9
1
5
8
2
4
7
3
3
6
4
2
5
5
1
4
6
0
3
7
0
2
8
0
1
9
0
a. What is the quantity of pizza bought and sold after the imposition of the tax? What is the
price paid by consumers? What is the price received by producers?
b. Calculate the consumer surplus and the producer surplus after the imposition of the tax. By
how much has the imposition of the tax reduced consumer surplus? By how much has it
reduced producer surplus?
c. How much tax revenue does Collegetown earn from this tax?
d. Calculate the deadweight loss from this tax.
Solution 17
Question 18
WORK IT OUT Interactive step-by-step help with solving these problems can be found
online.
18. Nile.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10%
discount on every book it sells. Nile.com knows that its customers can be divided into two
distinct groups according to their likely responses to the discount. The accompanying table
shows how the two groups respond to the discount.
Group A (sales
per week)
Group B (sales
per week)
Volume of sales before
the 10% discount
1.55 million
1.50 million
Volume of sales after
the 10% discount
1.65 million
1.70 million
a. Using the midpoint method, calculate the price elasticities of demand for group A and group
B.
b. Explain how the discount will affect total revenue from each group.
c. Suppose Nile.com knows which group each customer belongs to when he or she logs on and
can choose whether or not to offer the 10% discount. If Nile.com wants to increase its total
revenue, should discounts be offered to group A or to group B, to neither group, or to both
groups?
Solution 18
Question 19
19. The U.S. government wants to help the American auto industry compete against foreign
automakers that sell trucks in the United States. It can do this by imposing an excise tax on
each foreign truck sold in the United States. The hypothetical pre-tax demand and supply
schedules for imported trucks are given in this table.
Price of
imported truck
Quantity of
imported trucks
(thousands)
Quantity
demanded
Quantity supplied
$32,000
100
400
31,000
200
350
30,000
300
300
29,000
400
250
28,000
500
200
27,000
600
150
a. In the absence of government interference, what is the equilibrium price of an imported
truck? The equilibrium quantity? Illustrate with a diagram.
b. Assume that the government imposes an excise tax of $3,000 per imported truck. Illustrate
the effect of this excise tax in your diagram from part a. How many imported trucks are
now purchased and at what price? How much does the foreign automaker receive per
truck?
c. Calculate the government revenue raised by the excise tax in part b. Illustrate it on your
diagram.
d. How does the excise tax on imported trucks benefit American automakers? Whom does it
hurt? How does inefficiency arise from this government policy?
Solution 19
19. a. The equilibrium price without government interference is $30,000 and the equilibrium
quantity is 300,000, as shown by point E in the accompanying diagram.
