A . What effect will a tax on cigarettes have on the consumption of cigarettes and on the wallets of smokers who are addicted to cigarettes? b. What effect will a tax on cigarettes have on the decision of teenagers to smoke? c. Describe the cross elasticity between cigarettes and the price of a Nicoderm patch, which is used to fight the craving for nicotine
a . Addicted smokers have an inelastic demand for cigarettes, so they will pay the higher price (hurting
their wallets) and continue to smoke about the same number of cigarettes as before the tax.
b. Since the tax raises the cost of a pack of cigarettes, fewer teenagers will choose to smoke, ceteris
paribus.
c. Cigarettes and Nicoderm patches are substitute goods, so the cross elasticity should be a positive
number.
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A farmer is deciding whether or not to add fertilizer to his or her crops. If the farmer adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, the farmer should add fertilizer if it costs less than:
a. $12.50 per pound. b. $20 per pound. c. $80 per pound. d. $100 per pound.
A run on a bank may occur if
a. depositors withdraw some funds to invest in the stock market. b. required reserves are increased. c. interest rates are raised. d. depositors lose confidence in the bank and attempt to withdraw all their funds. e. All of the above are correct.