Gce Model Questions Vol1 2024 Economics Question 3

Practice essay / theory question 3 from the 2024 Gce Model Questions Vol1 Economics examination. This question covers Elasticity, Price elasticity of demand, Total revenue, Tax incidence .

Gce Model Questions Vol1 2024 Economics Essay / Theory
Topics: Elasticity Price elasticity of demand Total revenue Tax incidence
Question 3 GCE_MODEL_QUESTIONS_VOL1 • 2024 • ECONOMICS • essay

The government of Country X is considering raising the excise tax on cigarettes. The market for cigarettes can be approximated by the linear demand equation Q = 120 – 2P, where Q is the quantity demanded (in thousands of packs per month) and P is the price per pack (in Naira). Currently the price is N15 per pack. Assume the tax increase will raise the retail price from N15 to N20 per pack.

Question Parts

( a )
Using the midpoint (arc) method, calculate the price elasticity of demand between the price of N15 and N20.
( b )
State whether demand in this price range is elastic, inelastic or unit‑elastic and explain what this implies for total revenue when the price rises from N15 to N20.
( c )
If the tax increase of N5 per pack raises the price from N15 to N20, estimate the percentage change in quantity demanded using the elasticity you obtained, and discuss the likely effect on tax revenue collected by the government.
( d )
Discuss two factors that could cause the price elasticity of demand for cigarettes to differ from the value you have calculated above.

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About This Question

This is Gce Model Questions Vol1 2024 Economics Question 3. It is one of the essay questions from the 2024 Gce Model Questions Vol1 Economics examination.

The question covers Elasticity, Price elasticity of demand, Total revenue, Tax incidence .

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