Review the example of the New Jersey cigarette tax (p. 71). Using graph paper or a computer, draw supply and demand curves that will yield the prices and quantities before and after the tax. (Figure 4-10 shows the example for a gasoline tax.) For this example, assume that the supply curve is perfectly elastic. [Extra credit:
A demand curve with constant price elasticity takes the form Y = AP-', where Y is quantity demanded, P is price, A is a scaling constant, and e is the (absolute value) of the price elasticity. Solve for the values of A and e which will give the correct demand curve for the prices and quantities in the New Jersey example.]