The Impact of an Exercise Tax on demand, supply, price and quantity demanded
An exercise tax shifts the producers demand curve down with a similar quantity as that of the tax. This means that there is a decrease in the quantity that buyers in the market demand. An increase in quantity demanded leads to a surplus in the quantity of the supply available in the market as the available buyers have low capability of exhausting the amount of cigarettes available in the market. On the other side, the excise tax will lead to an increase in the price of cigarettes with the same proportion as the amount of the tax. In addition to that, the prices that the producers receive from the sale of cigarettes will decrease by the same margin as the size of the tax (Varian 227).
Factors that affect the Price Elasticity of Demand
There are several factors that affect the price elasticity of demands. One of these factors is the level of prices. Expensive goods such as cars have high elasticity of demand as a result of the sensitivity to price changes. On the other hand, the price elasticity of demand for inexpensive good such as match boxes rarely changes the demand by a significant amount. Another factor that affects the price elasticity of demand is the income level. The elasticity of demand for any product is less in groups with higher income levels as compared to the low income levels. This is as a result of the fact that the impact of prices changes is bigger to the poor people than the rich (Varian 320).
The availability of close substitute is another factor that affects the elasticity of demand. Demand for a product with many substitutes for example Pepsi is more elastic as compared to that with a few or no close substitutes such as salt. Lastly, the nature of a commodity is another factor that affects price elasticity of demand. Necessity goods such as vegetables have inelastic demand while comfort goods such as refrigerators have elastic demand. Luxurious commodities such as cars have more elastic demand than the comfort goods (Varian 323).
The Combination purchased to Maximize Utility
For a consumer to maximize utility he must be at the consumer equilibrium condition. Economists express this condition by equating all of the marginal utilities per dollar that the consumer spends in buying a certain commodity.
MU is the marginal utility
Prices of A, B, and C are $2, $3, and $1 respectively.
1st 2nd 3rd
4th 5th 6th
As seen from the above calculation, there is no single equation where the marginal utility per dollar is at equilibrium hence there is no combination where the consumer has the option of maximizing the utility. However, the consumer is closer to maximizing the utility in the seventh combination (Varian 434).
Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 7. New York: WW Norton, 2010.