(Please make an answer for each good listed) TIA 3.) If the government wants to raise...

(Please make an answer for each good listed) TIA

3.) If the government wants to raise tax revenue, which of the following items are good candidates for an excise tax? Why?

a.) granola bars

b.) cigarettes

c.) toilet paper

d.) automobile tires

e.) bird feeders

Expert Solution

a) Demand for granola bars is elastic because other substitutes are available. So, an increase in price of granola bars will not lead to increase in tax revenue.

b) Demand for cigarettes is inelastic because other substitutes are not available in tobacco segment. So, if price of cigarettes increases, people continues to demand it. Thus, an increase in price of cigarettes lead to increase in tax revenue.

c) Demand for toilet paper is inelastic because other substitutes are not available. So, if price of toilet paper increases, people continues to demand it. Thus, an increase in price of toilet paper lead to increase in tax revenue.

d) Demand for automobile tires is elastic because if price of tires increases, people will not buy tires frequently and will opt for other mode of transportation. So, an increase in price of automobile tires will not lead to increase in tax revenue.

e) Demand for bird feedre is elastic because bird feeders are not highly demanded. So, if price of bird feeders increases, people will start buying their own wood which will be cheaper and make their own bird houses.

Rahul Sunny answered 1 year ago

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