Use the tobacco elasticity data given below to answers a), b) and c).
Own price elasticity of demand = -0.6
Income elasticity of demand = +0.3
Cross price elasticity of demand with respect to food prices = -0.2
Price elasticity of supply = +0.3.
a) If there is a $1 per unit tax on tobacco which is collected by sellers then explain whether the buyers or sellers bear the greater burden of the tax.
b) If incomes increase by 10%, food prices increase by 20% and a fungus reduces the harvest of tobacco (all at the same time) then explain whether these changes would cause the following variables to rise, fall or stay constant.
(i) price paid by buyers
(ii) price received by sellers
(iii) tax revenue
c) If the tobacco tax is increased for $1 to $2 then explain whether this would cause the following variables to rise, fall or stay constant
(i) consumer spending on tobacco
(ii) firm revenue from tobacco sales
(iii) tax revenue from tobacco sales
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