Suppose that the demand for cigarettes and supply of cigarettes in a hypothetical country are as follows:
Question:
Suppose that the demand for cigarettes and supply of cigarettes in a hypothetical country are as follows: QD = 2000-200P QS = 200P Where QD is the number of packs demanded and P is the price per pack.
(a) Find the price and quantity of cigarettes, assuming the market is competitive.
(b) In an effort to reduce smoking, the government levies a tax of $2 per pack. Compute the quantity of cigarettes after the tax, the price paid by consumers, and the price received by producers.
(c) How much revenue does the tax raise for the government? Does this tax impose the excess burden on smokers and/or producers? If yes, how much?
(d) How would your analysis change if you learned that secondhand smoke from cigarettes posed a health hazard to other people? (Do not provide a numerical answer, but draw a diagram.)
Expert Answer:
Equilibrium in a competitive market we set Qd Qs Qd Qs 2000 200P P 200 10 P P 2P 10 P 5 Equil... View the full answer
