Suppose that the market for cigarettes is a competitive market and is described by the following supply and demand functions: Demand: QD = 80 - 2P Supply: QS = - 10 + 0.5P
(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
(c) Suppose the government wants to reduce the consumption of cigarettes to 6 packets. What size specific (per unit) tax will the government impose on cigarette producers to achieve this outcome?
(d) What is the per unit burden of the tax experienced by consumers?
(e) What is the per unit burden of the tax experienced by producers?
(f) What is the total amount of tax revenue raised by the per unit tax?
(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.