QUESTION ONE [25] 1.1 For many years, South Africa's finance...

QUESTION ONE [25] 1.1 For many years, South Africa's finance minister has raised the tax on the sale of cigarettes. Using the diagram below, explain whether the burden of the tax Is falling on the buyer or the seller. (10) 1.2 Assume the government of a country establishes a minimum wage of $200,00 per month for the hospitality industry. a. Are these wage controls a price ceiling or a price floor? Motivate your answer. (5) b. If these wage controls are effective, would one expect to see a surplus or a shortage of waiters? Choose from the one correct diagram below to motivate your answer. (10)

Transcript

00:02 In north and south, texas, our kind of the price of a pack of cigarettes starts out at a dollar.

00:09 And the north is thinking to put a $2 a pack tax on cigarettes.

00:16 And the cost for people to smuggle their cigarettes in from the south would be the dollar for the pack plus the smugglers charge a $1 .85 per pack.

00:28 And so we want to show first a case where it makes sense for the people in the north to pay to smuggle the cigarettes in.

00:38 So our first demand and supply curve shows demand that's pretty unelastic.

00:51 And here's our supply.

00:53 And let's say that we're here without the tax at a dollar.

00:59 So when we put our $2 tax on, that's going to shift the supply curve up by $2.

01:04 So my new supply curve would be maybe something like this looks like about $2.

01:14 And let's say that that means the equilibrium price of a pack of cigarettes is going to be $2 .90 after the tax.

01:26 So this would be a case where it would make sense to smuggle the cigarettes in because the burden of the tax on consumers is $1 .90.

01:37 The cost of smuggle is only $1 .85.

01:40 So consumers would be better off by nickel per pat to pay $2 .85 to have the cigarette smuggled in rather than pay the tax and end up paying $2 .90.

01:54 In this case, the burden on the consumers of that $2 .00 .90.

01:59 And the other 10 cents would be the burden on the producer.

02:03 So we wanted to show our consumers burden is here in green.

02:08 $1 .90 and my producer's burden will put in blue, that'd be the other 10 cents of the tax.

02:17 So to say it generally, any time the consumer's burden is greater than $1 .85 per pack, so that would mean if the price is more than $285 a pack, then it makes sense to pay the $1 .85 to smuggle.

02:36 But part b wants us to show a case where it doesn't make sense to smuggle.

02:42 For that to happen, the burden on the consumers has got to be less, and the burden on consumers decreases when the demand curve is less inelastic.

02:53 So if we put in our less inelastic or more elastic, whichever way we want to say it, demand curve and put in our same kind of support, curve, here's the dollar in the north before the tax, we put our $2 tax home...

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