Reference no: EM132667779

Suppose that the market for cigarettes is a competitive market and is described by the following supply and demand functions:

Demand: QD = 100000 - 500P

Supply: QS = - 20000 + 2000P

Where Q is the number of packets and P is the price per packet of cigarettes.

(a) Calculate the equilibrium price and quantity and draw a diagram to illustrate your answer.

(b) Show on your diagram and calculate the size of the:

(i) Consumer surplus

(ii) Producer surplus

(iii) Total surplus

(iv) Deadweight loss

(c) Suppose the government wants to reduce the consumption of cigarettes to 50000 packets. What size specific (per unit) tax will the government impose on cigarette producers to achieve this outcome?

(d) What is the per unit incidence or burden of the tax experienced by consumers?

(e) What is the per unit incidence or burden of the tax experienced by producers?

(f) On a new diagram, show and calculate the size of the following after the introduction of the tax:

(i) Consumer surplus

(ii) Producer surplus

(iii) Tax revenue

(iv) Total surplus

(iv) Deadweight loss

(g) According to the supply and demand model is society worse off or better of as a result of the imposition of the per unit tax? Explain your answer.