A country that does not tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as: 

QD = 140,000 - 25,000P; 

QS = 20,000 + 75,000P,

 where Q = daily sales in packs of cigarettes, and P = price per pack. The country has hired you to provide the following information regarding the cigarette market and the proposed tax.

a.   What price and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by buyers and sellers respectively?

b.   Calculate the deadweight loss from the tax. Could the tax be justified despite the deadweight loss? What tax revenue will be generated?

Answer rating: 100% (QA)

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