l
OMo
ARc
PSD|
1
1
629
741
ECON1580Di
scussi
onPOSTUNI
T.3
, l
OMo
ARc
PSD|
1
1
629
741
Supp osether
eisab i
llt
oincr
easetheta
xonc igar
ett
e sby$1perpack
coupledwithanincometaxcutof$500.Supposeap ers
ons mokesa
n
aver
a geof5 00pac
k sofci
garett
esperyea
r—andwou ldthusfac
eatax
i
n c
rea seofabout$500peryearfr
omthecigare
ttetaxatth
ep er
son’
s
curr
e ntle
velofconsumpti
on.Theinc
omet axme as
urewo ul
dincr
easeth
e
person’saft
er-
taxi
ncomeb y$500.
Wouldt
hecombi
nedmeas
uresb
elik
elyt
oh a
veanyeff
ectont
he
pe
rson’
scons
umpti
onofc
iga
ret
tes
?Wh yorwhyn
o t
?
Theuti
l
it
y-
ma x
imi
zin
gb eh
aviormodeli
ndi
cat
eshowecon
omi
stsa
ssume
th
atconsumer
smakechoicesconsi
st
entbyat
tai
ni
ngt
hemax
imumtot
al
ut
il
it
ypossi
bl
eforagiv
enb u
d getc
onst
rai
n.
Ther
efor
efoll
owingthema rginal
decisi
onrule,cons
ume rswillac
h i
eve
th
eu t
il
it
y-
ma xi
mizin
gc ondit
ionasex pen
ditur
ese qua
l c
on sumers'
budget
s,andrat
iosofma rgi
naluti
li
tytopric
ea r
ee qualf
o ral
lpairsof
goodsandservi
ces.I
nc ontr
a c
tconsump t
ion,addi
ti
onalut i
l
it
yp erdol
l
ar
spen
tisident
ic
al f
oral
l goodsands er
vices,al
lt
h i
ngspos si
ble.
Th e
margi
naluti
l
it
yfromap ar
ti
cu l
argoodorse r
vic
ewou ldeve nt
ual
ly
di
minis
ha sconsumersc ons
u memo reofitduri
ngtheperiod.
Thelawofdemandd emonst
rat
edani n
c r
e a
sei npri
ceinduc
esar ed
uct
ion
i
nqu ant
it
ydemanded(Rit
tenbe
rg&Tr egart
he n,2
009).Consi
deri
ngari
se
i
nc i
gare
ttepr
ice
s,onewo ul
dexpectthatpeo p
lewouldpurchas
efewer
cig
aret
tesdepi
ct
ingtheind
ivi
duald
e man dcu r
veref
lect
inguti
l
it
y-
ma x
imiz
ingadj
ustmentbyconsumerstov a
riousma r
ketpri
ces
(Ri
tt
enberg&Tregar
then
,2009).
Theans
wertoth
isqu
est
ionmaybesub
ject
iv
easth
etaxin
cre
asemig
ht
ca
u s
eap e
rsont
osmokeles
s,t
ota
ll
ygi
venupsmoki
ng,
ormaketh
em
OMo
ARc
PSD|
1
1
629
741
ECON1580Di
scussi
onPOSTUNI
T.3
, l
OMo
ARc
PSD|
1
1
629
741
Supp osether
eisab i
llt
oincr
easetheta
xonc igar
ett
e sby$1perpack
coupledwithanincometaxcutof$500.Supposeap ers
ons mokesa
n
aver
a geof5 00pac
k sofci
garett
esperyea
r—andwou ldthusfac
eatax
i
n c
rea seofabout$500peryearfr
omthecigare
ttetaxatth
ep er
son’
s
curr
e ntle
velofconsumpti
on.Theinc
omet axme as
urewo ul
dincr
easeth
e
person’saft
er-
taxi
ncomeb y$500.
Wouldt
hecombi
nedmeas
uresb
elik
elyt
oh a
veanyeff
ectont
he
pe
rson’
scons
umpti
onofc
iga
ret
tes
?Wh yorwhyn
o t
?
Theuti
l
it
y-
ma x
imi
zin
gb eh
aviormodeli
ndi
cat
eshowecon
omi
stsa
ssume
th
atconsumer
smakechoicesconsi
st
entbyat
tai
ni
ngt
hemax
imumtot
al
ut
il
it
ypossi
bl
eforagiv
enb u
d getc
onst
rai
n.
Ther
efor
efoll
owingthema rginal
decisi
onrule,cons
ume rswillac
h i
eve
th
eu t
il
it
y-
ma xi
mizin
gc ondit
ionasex pen
ditur
ese qua
l c
on sumers'
budget
s,andrat
iosofma rgi
naluti
li
tytopric
ea r
ee qualf
o ral
lpairsof
goodsandservi
ces.I
nc ontr
a c
tconsump t
ion,addi
ti
onalut i
l
it
yp erdol
l
ar
spen
tisident
ic
al f
oral
l goodsands er
vices,al
lt
h i
ngspos si
ble.
Th e
margi
naluti
l
it
yfromap ar
ti
cu l
argoodorse r
vic
ewou ldeve nt
ual
ly
di
minis
ha sconsumersc ons
u memo reofitduri
ngtheperiod.
Thelawofdemandd emonst
rat
edani n
c r
e a
sei npri
ceinduc
esar ed
uct
ion
i
nqu ant
it
ydemanded(Rit
tenbe
rg&Tr egart
he n,2
009).Consi
deri
ngari
se
i
nc i
gare
ttepr
ice
s,onewo ul
dexpectthatpeo p
lewouldpurchas
efewer
cig
aret
tesdepi
ct
ingtheind
ivi
duald
e man dcu r
veref
lect
inguti
l
it
y-
ma x
imiz
ingadj
ustmentbyconsumerstov a
riousma r
ketpri
ces
(Ri
tt
enberg&Tregar
then
,2009).
Theans
wertoth
isqu
est
ionmaybesub
ject
iv
easth
etaxin
cre
asemig
ht
ca
u s
eap e
rsont
osmokeles
s,t
ota
ll
ygi
venupsmoki
ng,
ormaketh
em
