Question

Externalities & with some Implications of Elasticity

1. Suppose the demand for cigarettes is represented by the equation P = 20 - .04Q and the supply is represented by P = 5 + .01Q where P is in dollars and Q is in billions. Cigarettes are also a leading cause of cancer. So many people want to tax cigarettes to discourage smoking. Thanks to this argument and the need for tax revenues suppose you raise the tax to $5 per package.
   1. What will be the new quantity?
   2. How much tax revenue will you get?
   3. What will be the new price to the consumers?
   4. What will be the new price to the sellers?
   5. Compare the producer surplus and consumer surplus to when there were no taxes.
   6. To get more tax revenues suppose you raise the tax from $5 to $10 per package, how much tax revenue would you get? Did this strategy to get more tax revenue work?
   7. If you raise the tax to $15 how much tax revenue will you get?

Answer 1