Final answer:
With a 21% ad-valorem tax, the quantity demanded for cigarettes will decrease, and the pre-tax market price will be lower than the post-tax price. Tax revenue is the product of tax per pack and the number of packs sold, and the exact figures depend on the new equilibrium. The excess burden of the tax represents the economic inefficiency created by the tax. The correct answer is option A) Calculate the antity and pre-tax prices that would be observed with an ad-valorem tax on cigarette packs of 21%
Step-by-step explanation:
When considering an ad-valorem tax of 21% on cigarette packs that would display 600 million packs sold per year at a price of $20 per pack without taxes, we must calculate the new quantity demanded and the pre-tax price after the tax is applied. Given the compensated demand elasticity of 0.5, we can expect that the quantity demanded would decrease in response to an increase in price due to the tax. Similarly, with a supply elasticity of 2.5, suppliers are responsive to price changes.
Calculating the new quantity and price: In the presence of a tax, the price received by suppliers is the market price minus the per-unit tax. The actual price paid by consumers would be the market equilibrium price plus the 21% tax. Without the specific demand and supply equations, we cannot calculate exact figures, but we can state that the equilibrium quantity will decrease, and the pre-tax price will be lower than the post-tax price. The tax burden will be shared between consumers and producers depending on the relative elasticities of demand and supply.
To calculate the tax revenue, we would multiply the number of packs sold by the tax per pack, which is 21% of the market price. Again, without exact figures for the new equilibrium price and quantity, we can't provide a specific revenue amount.
The excess burden of the tax, or the deadweight loss, occurs when the tax leads to a decrease in the quantity traded below the level that would be traded without the tax, causing a loss of economic efficiency. This is typically represented by a triangle in the demand and supply diagram and is larger when demand or supply is more elastic.