A country's government plans to increase the tax on cigarettes from $1 per pack to $2 per pack to discourage smoking. The country currently has a demand for cigarettes of Q = 1000 - 20P, where P is the price per pack and Q is the quantity demanded. The supply of cigarettes is fixed at 500 packs per month. Calculate the price elasticity of demand and the price elasticity of supply at the initial price of $1 per pack. Also, determine the change in the quantity demanded and the change in the quantity supplied after the tax increase. Assume that the tax is fully passed on to consumers in the form of a higher price.

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The detailed answer for the above question is provided below To calculate the price elasticity of demand and the price elasticity of supply we first n... View the full answer