Question

Suppose the demand and supply functions of cigarettes in a competitive market are as follows:

Demand: Q = 100 – 4P

Supply: Q = –20 + 2P

a. Find the equilibrium price and quantity of cigarettes. (2 marks)

b. Suppose the government imposes a $6 per-unit tax on consumers of cigarettes. Find the per-unit price of cigarettes paid by consumers and the per-unit price of cigarettes received by sellers after the imposition of the tax. Show your workings. (4 marks)

c. Draw a well-labeled diagram showing the effect of the tax on the price of cigarettes paid by buyers, the price of cigarettes received by sellers, the government tax revenue and the equilibrium quantity of cigarettes. (5 marks)

d. Calculate the per-unit tax burden on consumers and sellers. Show your workings. (2 marks)

e. Calculate the after-tax consumer surplus, producer surplus, and deadweight loss. Show your workings. (6 marks)

Answer 1