05 Jun Question ES2550: Project Project Introduction:
Question
ES2550: Project
Project Introduction:
Different economic studies estimate the price elasticity of demand for certain goods, some of
which are reported on page 176 of the Hubbard/OBrien textbook. The following table presents
select elasticity of demand estimates from those reported on page 176.
Product
Estimated Elasticity
Barnes & Noble
books
-4.00
Coca-Cola
-1.22
Cigarettes
-0.25
Beer
-0.23
Gasoline
-0.06
Part 1: In your project, address the following questions:
Using the elasticity estimates in the table above, classify the price elasticity
demand as elastic or inelastic. Explain your reasoning.
Explain the implications of those classifications on tax revenue collections when
the per-unit tax increases as opposed to decreases.
Using those classifications, make some assumptions regarding tax incidence. For
instance, will buyers or sellers pay a larger portion of the tax per unit? Explain.
Based on the elasticity classifications, their effect on tax revenue, and tax
incidence, which goods would the government prefer to tax?
Part 2: In your project, address the following questions in this order:
Using the ITT Tech Virtual Library, research tax rates imposed on cigarettes for
the state in which you reside and two surrounding states. Discuss the changes in
tax rates on cigarettes in those states over the last few years. Predict the
implication of this tax rate change on tax revenue according to theory.
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