Question

The market for cigarettes is highly regulated in the U.S. and other countries. Smoking has been shown to harmful to the smokers and individuals around them, so the government decides to tax cigarettes.

(A) Graph or explain what the effect of a tax would do equilibrium price and quantity.

Now, suppose the government wants to help tobacco farms and provides agricultural subsidies to tobacco growers.

(B) Ignore the cigarette tax from A, and graph or explain what the effect of a tobacco subsidy would do to equilibrium price and quantity.

(C) Suppose the equilibrium price of cigarettes in the U.S. is $7 a pack and the federal government mandates a price floor of $10. What would this do to price and quantity of cigarettes?

(D) Again suppose the equilibrium price of cigarettes in the U.S. is $7 and the federal government mandates a price ceiling of $10. What would this do to price and quantity of cigarettes

Answer 1

A) Effect of tax on cigarettes

When govt imposes tax on cigarettes to discourage its consumption and production, the supply curve shifts leftward.

See graph---

The new Equilibrium point E' determines the Equilibrium Quantity Q' less than earlier Quantity Q & Equilibrium price P', higher than Equilibrium price P'.

B) Effect of subsidies on tobacco

Govt provides subsidies to producing firms to protect such industry( tobacco firms) With subsidies, the supply increases and supply curve shifts rightward.

New Equilibrium poit E' determines the Equilibrium quantity Q' more than Q & new Equilibrium price P', which is lower than initial p.

C)​​​​​​Price floor and cigarettes market

Price floor is minimum price to be charged from customers .It is imposed to protect producers.When price floor is charged ($10) above the Equilibrium price of $7, the Equilibrium quantity decreases from Q to Q'.

D) Price Ceiling and cigarettes market

price ceiling is not binding ,so Equilibrium price ($7) is the market price which is below price Ceiling of $10

As price ceiling is above the Equilibrium price, it is not binding as price ceiling is the maximum price to be charged from customer,but if the Equilibrium price is below the orice ceiling ,it will have no effect,that is ,the price will be $7 in the market.