If the government announces today that a tax increase of 80 cents per pack of cigarettes...

If the government announces today that a tax increase of 80 cents per pack of cigarettes is to take place in two weeks, what would you expect to happen today to the current market for cigarettes?

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Expert Solution

Future expectations with respect to price impacts the demand for a good.

When consumer expects an increase in price of a commodity in future they tends to increase their current demand for the said commodity.

On the other hand, when consumer expects a decrease in price of a commodity in future they tends to decrease their current demand for the said commodity.

So, if the government announces today that a tax increase of 80 cents per pack of cigarettes is to take place in two weeks then, in that case, consumers would expect an increase in price of cigarettes in the near future.

Due to this, they will increase their current demand for cigarettes.

Given the supply of cigarettes, this increase in demand for cigarettes will lead to an increase in price of cigarettes and quantity exchanged of cigarettes.

Thus,

In the current market for cigarettes, price and quantity exchanged of cigarettes will increase.

Rahul Sunny answered 1 year ago

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