Question

Upper Slobbovians smoke 10 million cigarettes per year, so do Lower Slobbovians. To discourage smoking, each country imposes an excise tax of 50 cents per pack. As a result, the price of cigarettes rises by 35 cents in upper Slobbovia, but only by 15 cents in lower Slobbovia even though the supply curves are identical in both countries. True or False: The Upper Slobbovian excise tax discourages smoking more effectively than the lower Slobbovian excise tax.


Draw an initial supply curve in both Upper and Lower Slobbovania. Now raise the supply curve in both graphs upward (vertical at all points) by exactly 50 cents. In the first graph, draw a demand curve that shows a 35 cents rise, in the second a demand curve that gives you a 15 cents rise. What must the slopes of the demand curve be in order to achieve this result? What happens to quantity in each market?