Reference no: EM132479827

A country that does not tax cigarettes is considering introducing a 0.4 per pack tax, which will be paid by the sellers. The supply and demand curves for cigarettes in this country are given by Qs=20+75P, Qd=140-25P.

i) What are the equilibrium values for price and quantity if there is no tax?

ii) What would be the equilibrium values for price and quantity after the imposition of the tax?

Now suppose the cigarette sellers spend 10,000 lobbying the government, and, as a result, the government changes the tax. In particular, rather than being paid by the sellers, the tax is now paid by the consumers in the form of a sales tax. The amount of the tax, however, remains at 0.4.

iii) What are the new equilibrium values for price and quantity, where price denotes the amount of money received by a seller per pack?

iv) Comment on whether the lobbying effort was profit maximizing on the part of the sellers.