Cigarettes have long been subject to excise tax – a per cigarette tax levied on the suppliers of cigarettes. (The tax applies to all tobacco products, however for the purposes of this exam assume cigarette and tobacco consumption are the same thing). In 2016 the federal government announced that the excise tax rate for cigarettes would rise by 12.5% a year for the next 4 years. Over this period tax revenue collected from the sale of cigarettes has increased considerably. Legal cigarette consumption has fallen to an all-time low in Australia due to a combination of the tax on cigarettes, and public health initiatives such as plain packaging, health warnings and banning advertisements.

Consider the following two policies aimed at reducing cigarette smoking: (i) A tax on the suppliers of cigarettes, and (ii) The public health campaign initiatives. Illustrate both of these policies separately using a fully labelled and explained demand and supply diagram for each of parts (i) and (ii). Do not use actual numbers; this is intended as a theoretical exercise. Compare and contrast the impact on equilibrium price and quantity of cigarettes of each of these policies, explaining your answer with reference to the diagrams. Consider the impact of each policy on government revenue. Explain your answer. Can the impact on government revenue be illustrated on either of your diagrams? If so, indicate and explain the area on the diagram/s that represents government revenue.

Question text

Which of the following statement(s) is correct?

(x)   Deadweight loss measures the loss in a market to buyers and sellers that is not offset by an increase in government revenue.

(y)   The imposition of a tax on a good raises the price that buyers effectively pay, but lowers the price that sellers effectively keep.

(z)   When the government places a tax on a good, the loss of consumer surplus and producer surplus to buyers and sellers is more than the tax revenue raised from the imposition of the tax.

Select one:

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (x) and (y) only

E. (y) only

Which of the following statement(s) is correct?

(x)   Assume that the demand for food is relatively inelastic and the demand for jewelry is relatively elastic. Suppose government imposed the same excise tax on both goods. As a result, the tax revenue from the tax on jewelry will always be less than the tax revenue from the tax on food.

(y)   Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade due to marginal buyers and sellers leaving the market.

(z) The deadweight loss from taxes is lower when tax rates are higher than when tax rates are lower.

Select one:

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (y) only

46. In terms of “market power” which of the below is correct, going from the firms with the most to the least “market power’? (Hint: envision the “level of competition” spectrum)

oligopoly, monopoly, perfect competition, monopolistic competition

monopoly, oligopoly, monopolistic competition, perfect competition

perfect competition, monopolistic competition, oligopoly, monopoly

monopolistic competition, monopoly, oligopoly, perfect competition

43. A cartel is (e.g. OPEC )

an agreement among rival firms to set prices independently

a group of monopolistically competitive firms which charge the same price

a group of oligopolistic firms that engage in formal collusion

a group of oligopolistic firms that engage in informal collusion

33. In the long run, a monopolist

will shut-down if it is incurring economic losses

earns a normal profit because other firms can easily enter the market

always earns an economic profit because of the existence of barriers to entry

can earn an economic profit because of the existence of barriers to entry

32. A monopolist will likely shut down in the short run if

price is less than average total cost (ATC)

price is less than average variable cost (AVC)

marginal revenue is less than AVC

price is less than average variable cost (AVC) and marginal revenue is less than AVC because for the monopolist, price = marginal revenue

marginal revenue is less than ATC

PROBLEM 4.3A

Analysis of Adjusted Data

Gunflint Adventures operates an airplane service that takes fishing parties to a remote lake resort in northern Manitoba, Canada. Individuals must purchase their tickets at least one month in advance during the busy summer season. The company adjusts its accounts only once each month. Selected balances appearing in the company’s June 30 adjusted trial balance appear as follows.

Other Information

1. The airplane is being depreciated over a 15-year life with no residual value.

2. Unearned passenger revenue represents advance ticket sales for bookings in July and August at $300 per ticket.

3. Six months’ airport rent had been prepaid on May 1.

4. The unexpired insurance is what remains of a 12-month policy purchased on February 1.

5. Passenger revenue earned in June totaled $40,000.

Instructions

1. Determine the following.

   1. The age of the airplane in months.

   2. The monthly airport rent expense.

   3. The amount paid for the 12-month insurance policy on February 1.

2. Prepare the adjusting entries made on June 30 involving the following accounts.

   1. Depreciation Expense: Airplane

   2. Airport Rent Expense

   3. Insurance Expense

   4. Passenger Revenue Earned

In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows:

Assume that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years.
2-a. In the journal below, complete the necessary journal entries for the year 2021 (credit "Various accounts" for construction costs incurred).
2-b. In the journal below, complete the necessary journal entries for the year 2022 (credit "Various accounts" for construction costs incurred).
2-c. In the journal below, complete the necessary journal entries for the year 2023 (credit "Various accounts" for construction costs incurred).

1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years. (Leave no cells blank - be certain to enter "0" wherever required. Loss amounts should be indicated with a minus sign.)

Kabul Star Hotel adjusts its accounts on a monthly basis. Most guests pay at the time they check out, and the amount collected is credited to Rental Revenue. A few guests pay in advance for rooms and these amounts are credited to Unearned Rental Revenue at the time of receipt.

a: Salaries earned by employees but not paid amount to $20,000.

b: As of Dec 31, Kabul Star Hotel has earned $11,000 rental revenue but has not received any amount yet.

c: On Dec 1, a room was rented to a corporation for six months at a monthly rental of $5,000. The entire six month rental of $30,000 was collected in advance and credited to Unearned Rental Revenue.

d: A Corolla Car to carry guests to and from the airport had been rented on Dec 15, at a daily rate of $250. No rental payment has yet been made.

e: Depreciation on the Hotel’s building is based on an estimated useful life of 15 years. The original cost of the building was $500,000 and a residual value of $50,000.

f: A one-year fire insurance policy had been purchased on Dec. 1, The premium of $24,000 for the entire life of the policy had been paid on Dec. 1 and recorded as Unexpired Insurance.

Instructions:

1. Prepare adjusting entries of the above transactions.

2. Prepare adjusted Trial Balance.

3. Prepare Financial Statements (Balance Sheet & Income Statement).

4. Prepare closing entries and prepare after closing trial balance.

Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD:

Demand: P= 1,000- 10Q

Total Revenue: TR= 1,000Q- 10Q²

Marginal Revenue: MR= 1,000- 20Q

MC= 100 + 10Q

where Q indicates the number of copies sold and P is the price in Ectenian dollars.

Complete the following table by finding the price and quantity that maximize the company’s profit and the price and quantity that maximize social welfare.

The deadweight loss from the monopoly is $ ___??.

Suppose, in addition to the costs above, the director of the film has to be paid. The company is considering four options:

1: A flat fee of 2,000

2. 50 percent of the profits

3. 50 ectenian dollars per unit sold

4. 50 percent of the revenue

Complete the following table by finding the price and quantity that maximize the company’s profit under each of the following options.

Cigarettes in Australia have long been subject to excise tax – a per cigarette tax levied on the suppliers of cigarettes. (The tax applies to all tobacco products, however for the purposes of this exam assume cigarette and tobacco consumption are the same thing). In 2016 the federal government announced that the excise tax rate for cigarettes would rise by 12.5% a year for the next 4 years. Over this period tax revenue collected from the sale of cigarettes has increased considerably. Legal cigarette consumption has fallen to an all-time low in Australia due to a combination of the tax on cigarettes, and public health initiatives such as plain packaging, health warnings and banning advertisements.

Part (a) Consider the following two policies aimed at reducing cigarette smoking:

(i) A tax on the suppliers of cigarettes, and

(ii) The public health campaign initiatives.

Illustrate both of these policies separately using a fully labelled and explained demand and supply diagram for each of parts (i) and (ii). Do not use actual numbers; this is intended as a theoretical exercise. Compare and contrast the impact on equilibrium price and quantity of cigarettes of each of these policies, explaining your answer with reference to the diagrams. Consider the impact of each policy on government revenue. Explain your answer. Can the impact on government revenue be illustrated on either of your diagrams? If so, indicate and explain the area on the diagram/s that represents government revenue.