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Imagine the market price for a pack of cigarettes is $6 per pack, and there are no taxes. Assume that each pack does a total of $5 worth of health damage to the smoker in the form of increased cancer risk, heart disease, etc. Further, each pack does a total of $3 worth of damage to non-smokers via secondhand smoke. Assume all people are fully aware of these damages and cigarettes are not addictive.
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Assume that Bart is willing to pay $8 for a pack of cigarettes, but not a penny more. In this market, where the price of cigarettes is $6 per pack, is it privately efficient for Bart to buy a pack at this price?
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Is it socially efficient for Bart to buy a pack of cigarettes at this price?
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Suppose that a new fertilizer lowers the cost of tobacco production, and the market price of cigarettes is now $1. Depending on your answers to
parts (a) and (b), is it now privately efficient for Bart to smoke? Socially efficient?
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Refer to the“constraint”between health and all other goods (X) as drawn in class. Suppose a new miracle pill is developed that increases the maximum attainable health (which we had labeled as point “F” in class– the highest point at which the constraint crosses the y-axis).
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Draw the original constraint before the miracle pill is available.
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On the same graph, draw a new constraint with the miracle pill available.
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How does the miracle pill affect the level of health and other goods (X) a
consumer will choose? You will need to add indifference curves to accomplish this.
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Continuing with the same constraint as in the question above, imagine the government puts a tax on the other goods (X).
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Draw the original constraint before the tax is imposed.
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On the same graph, draw a new constraint with the tax.
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How does the tax affect the level of utility the consumer will achieve?
You will need to add indifference curves to accomplish this.
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