Question

Consider the market for cigarettes. Suppose that the demand for packs of cigarettes is given by ??=100−(20/3)? and supply is given by ??=(80/3)?.

1. Solve for the equilibrium: ?∗ and ?∗.

2. Calculate consumer surplus, producer surplus, and total surplus. Remember that the formula for the area of a triangle is ½ base times height.

3. Suppose that government wishes to discourage the use of cigarettes. To do so, the government supposes a tax of $1 on cigarette buyers. Calculate the new price paid by buyers, the price paid by sellers and the new quantity consumed in the market. Hint: to calculate the new demand curve with the tax, note that the price that buyers pay is $1 more than the sellers receive, so ????????=???????−1. So you can plug in ???????=????????+1 into the demand equation: ?????=100−(20/3)(????????+1 ). This will give you a curve you can label ?−$1

4. Draw a supply and demand graph for the market for cigarettes after the tax is implemented. Mark the original equilibrium and new prices relevant to each party. Be sure to label all curves. Mark consumer surplus and producer surplus.

Answer 1