Question

Suppose the market demand for cigarettes is: QD = 10 − P, and the supply of cigarettes is: QS = −2 + P, where P is the price per pack of cigarettes a. Graph the supply and demand curves. b. What is the equilibrium price and quantity sold of cigarettes? Show this on the graph. If the government imposes a cigarette tax of $1 per pack, c. What is the price paid by consumers? d. What is the price faced by suppliers? e. What is the government revenue from the tax? f. How much is the consumers’ tax burden? g. How much is the producers’ tax burden? h. What is the deadweight loss of the tax?

Answer 1

A.

B. Equilibrium exists where Demand= Supply

10-P=-2+P

12/2=P

Equilibrium price=$6

Equilibrium Quantity= 10-6=4

New supply Qs=-2+P-1= P-3

C. New equilibrium after tax=

P-3= 10-P

13/2=P

Price paid by consumer= $6.5

Quantity= 10-6.5=3.5

D. Price received by sellers= Price paid by sellers-Tax= $6.5-$1=$5.5

E. Government revenue= Tax*Quantity= $1*3.5=$3.5

F. Consumers tax burden= Price paid by consumer- Equilibrium price= $6.5-$6=$0.5

G. Producer's tax burden= Equilibrium price-price received by sellers= $6-$5.5=$0.5

H. Deadweight loss= 1/2*tax*(change in quantity)=1/2*1*((4-3.5)=$ 0.25