Question

6. Explain the relationship between the elasticity and total revenue. (Remember Total Revenue = Price x Quantity Sold)

11. After economic class one day, your friend suggests that taxing tobacco would be a good way to raise revenue. In what sense is taxing tobacco a "good" way to raise revenue? In what sense is it not a "good" way to raise revenue?

Answer 1

6.

The Elasticity of demand can be measured through the formula (Ed)= -(dq/dp)*(p/q), which means the percentage of change in the quantity demanded of a good due to change in its price. It can also be represented in terms of price. E_d =p* f(p)

Whereas, total revenue = price * quantity sold = p*q

We can also write the Total Revenue as p*f(p), where q is defined as a function of price.

11.

Taxing tobacco is a "good " way to raise a revenue in the sense that the individuals who are addicted to consumption of tobacco in some way or the other will continue to buy it, even when the taxes are pretty high.

And taxing of tobacco is not a good way to raise a revenue in the sense that it will surely benefit the govt. But it would also increase the chances of the illegal transaction of tobacco in society. Nowadays we see that even after the new rule of govt. to put vivid images of diseases of tobacco consumption on the product cover, people rarely care to give up consuming tobacco. It not only affects the individual's health but of the society as well.