MU Government Want to Reduce the Consumption of Tobacco Question

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SECTION A
This section consists of 3 questions. Please answer any 2 of the 3 questions. You should
provide relevant diagrams while answering the questions.
1. Suppose that the government decides Australians should reduce the consumption
of tobacco and, therefore, it imposes a tax on tobacco products.
a. Should this tax be imposed on producers or consumers? Explain using
both words and a diagram.
b. If the demand for tobacco becomes more elastic, will this tax be more
effective or less effective in reducing tobacco consumption? (Hint: Draw two
diagrams, side by side, with the same supply curve and different demand
curves.)
c. If the government also wants to maximise the tax revenue, should it impose
taxes on tobacco products with high demand elasticity or low elasticity?
Explain.
[6+6+6 = 18 marks]
2. We have demand equation: P = 6-Q and supply equation: P = Q.
a. Calculate the equilibrium price, equilibrium quantity and the total surplus.
b. Suppose government imposes a per-unit tax of \$1 on producers. Derive the
new supply curve and calculate the new equilibrium price and quantity. Is
c. Now suppose demand becomes more elastic and we have a new demand
equation P=4-Q/3. How much is the deadweight loss from a tax of \$1 per unit
sold? Is the deadweight loss greater or smaller than that in question (b)? Why?
[6+6+6 = 18 marks]
3. Using the AS/AD model, discuss the likely short-run and long-run impacts of the
following events with proper diagram(s), assuming that the government takes
no further action:
a. A sudden health crisis (such as the coronavirus pandemic in the first half of
2020) that lowers workersÂ’ income (starting from the full-employment level).
b. An income tax cut by the government to support the economy (starting from
the full-employment level).
[9+9=18 marks]
SECTION B
This section consists of 2 questions. Please answer 1 of the 2 questions. Useful
statistics formulae and a cumulative standardised normal distribution table can be
found in the subsequent pages of this exam paper.
1. To study the relationship between weekly expenditure and weekly income of
recent graduates, the following data have been obtained from 10 alumni:
a. Calculate the sample covariance. How do you interpret this value?
b. Calculate the coefficient of correlation. How do you interpret this value?
[12+12 = 24 marks]
2. The manager of a firm that owns several stores in Australia wants to examine the
effects of advertising campaigns on the sales revenue of the stores in January 2021.
They collect data on advertising expenditure (\$000s) and sales revenue (\$000s) from 20
stores located in different cities, and estimates the following regression equation:
?????????????????? = ??0 + ??1 ???????????????????????????? + ????????
The output when using Excel to estimate the equation is given below:
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.43
R Square
A
Square
0.14
Standard Error
36.77
Observations
20
ANOVA
Regression
Residual
Total
df
1
18
19
SS
5658.89
24334.86
29993.75
MS
5658.89
1351.94
F
4.19
Intercept
Coefficients
197.12
2.12
Standard Error
27.70
C
t Stat
B
2.05
P-value
0.00
0.06
Significance F
0.06
a) Find the value of A, B, and C, and interpret their meanings.
b) Find the simple regression line and interpret the coefficients.
c) Can the manager conclude that there is a positive relationship between
advertising expenditure and revenue at (i) 1% significance level, (ii) 5%
d) The manager concludes that the advertising campaigns have been successful
because higher advertising expenditure caused higher sales. Why might the
manager be wrong?
[6+6+6+6 = 24 marks]
END OF EXAMINATION
Sample Mean: ?
X=
???
USEFUL STATISTICS FORMULAE
????????
????=1
??
????????
? 2
??? (???????? ????? )
Sample Variance: ?? =
= ????=1
???1
???1
????X =
(X???? ? X? )2 =
X 2 ??2
???
???
??X
2
????=1
????=1
2
???? ???????? 2
???
=
????=1 ??
??
???1
????
Sample Standard Deviation: ?? = ???2
?????? )
????????F
??? (????
(F ?????F? )
Sample Covariance: ??????(X, ??) =
????=1 ????
=
???1
????X?? = ??? (X???? ? X? )(?????? ? ??? ) =
???
????=1
????=1
???????? F???? ???????? F?
???
=
???1
????=1
???1
X???? ?????? ?
??X? ???
Sample Coefficient of Correlation: ?? =
??????(????,F)
????????F
=
??X ??????
??????????????F
General Addition Rule of Probability: ??(?? ???? ??) = ??(??) + ??(??) ? ??(?? ?????? ??)
General Addition Rule for Disjoint Events: ??(?? ???? ??) = ??(??) + ??(??)
Conditional Probability: ??(??|??) =
??(?? ?????? ??)
??(??)
General Multiplication Rule: ??(?? ?????? ??) = ??(??|??)??(??) = ??(??|??)??(??)
General Multiplication Rule for Independent Events: ??(?? ?????? ??) = ??(??)??(??)
Expected Value of a Discrete Random Variable:
?? = ?? (X) = ???
????=1 X???? ?? (X???? )
Variance of a Discrete Random Variable: ?? 2 = ??? [X???? ? ??(X)]2 ?? (X???? ) =
??
?????=1 X???? 2 ??(X???? ) ?
[??(X)]2
X??
Z-value in a Normal Distribution: Z =
?
Standard Deviation of the Sample Means: ?? =
X
????=1
?
?N
The Predicted Line for Simple Linear Regression Equation: ??????? = ??0 + ??1 X????
????????F
(???????? ?????? )(F???? ?F? )
and
(???????? ?????? )2
??????=1
??1 = ???????? = ?
???
??0 = ??? ? ??1X?
????=1
Coefficient of Determination: ?? =
2
???????????????????????? ?????? ?????? ??????????????
??????
?????????? ?????? ?????? ??????????????
= ?????? =
??????
??? (F???? ?F? ???? )2
Standard Error of the Estimate: ??F???? = ? ???2 = ?
????=1
???2
??? (F? ???? ?F? )2
?? (
?????=1
F???? ?F? )2
????=1
Source: Berenson et al. (2012).
Page 6 of 7
Source: Beren
son et al. (2012).
END OF EXAMINATION
Page 7 of 7

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Reduce the Consumption of Tobacco

will make tobacco products costly

the tax burden to the consumer

price and demand are inversely related

Initial quantity demanded

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