2023 JPJC J2 H2 EC Prelim P2 Suggested Answers

Jurong Pioneer Junior College (Economics Department) 1 Question 1 With rising income and influence of media, there is a rising consumption of cigarettes. To reduce the rising consumption, Singapore imposes in direct tax on cigarettes while Philippines introduces minimum price for cigarettes. (a) Explain how each of the abov e policy affects consumers’ expenditure on cigarett es. [10] (b) Using demand and supply analysis, discuss wheth er indirect tax or minimum price is more effective in reducing quantity of cigarettes sold with rising income and influence of media. [15] a) To reduce the negative effects due to consumptio n of cigarettes, government can either raise tax or set a minimum price. This will result in a r ise in price and hence discourage and reduce consumption of cigarettes. However, the impact on c onsumer expenditure (Price x Quantity) depends on the PED value of cigarettes. An indirect tax can be imposed on the cigarettes to discourage consumption of cigarettes. With a rise i n tax, this will increase the unit cost of production on the producers. Less profit will be made with the same selling price. Hence, firms will be less able and willing to supply a good at any gi ven price. This shifts the supply curve for cigarettes leftwards from S 1 to S 2 as shown in Figure 1. As cigarettes is quite additive in nature, the demand for cigarettes tends to be price inelastic. With a fall in supply, price rises and quantity demanded falls by less than proportionate. Hence total expenditure for consumers rises. Before tax, consumer expenditure is shown in the area 0P 1BQ 1. After tax, consumer expenditure rises from 0P 1BQ 1 to OP 2AQ 2. Hence, an indirect tax on cigarettes will result in consumers paying a higher price and given that the demand is price inelastic, consumer expenditure will rise. In general, the demand for cigarettes as a whole is price inelastic. However, with the introduction of electronic cigarettes, they may be viewed as substitutes for the traditional cigarettes. Hence, the demand is for cigarette may be price elastic. Price of cigarettes S2 Quantity of cigarettes D1 P1 S1 Q2 Q1 0 P2 A B Figure 1 Price of cigarettes S2 Quantity of cigarettes D1 P1 S1 Q2 Q1 0 P2 A B Figure 2

Jurong Pioneer Junior College (Economics Department) 2 In this case, with a fall in supply, price rises an d quantity demanded falls by more than proportionate. Hence total expenditure for consumers will fall. Before tax, consumer expenditure is shown in the area 0P 1BQ 1 in Figure 2. After tax, consumer expenditure falls from 0P 1BQ 1 to OP 2AQ 2. Hence, an indirect tax on cigarettes will result in consumers paying a higher price. Whether consumer expenditure will rise or fall will depend o