1. Suppose that the market for cigarettes in a particular town has the following supply and demand curves: Qs = P and Qd = 50 -P , where the quantities are measured in thousands of units. Suppose that the town council needs to raise $300,000 in revenue and decides to do this by taxing the cigarette market. What should the excise tax be in order to raise the required amount of money?
2. When gasoline prices reached $3 per gallon, public policy makers considered cutting excise taxes by $0.30 per gallon to lower gasoline prices at the pump. In discussing the eects of the proposed tax reduction, a news commentator stated that the effect of the tax reduction should lead to a price of about $2.70 per gallon, and, that if the price did not drop by as much, it would be evidence that oil companies are conspiring to keep gasoline prices high. Evaluate the commentator's claim.