Supply: Qs=600+100P
Demand: Qd=1200-200P
Where Qs is the supply of packs of cigarattes and Qd is the demand for packs of cigarettes
1. Draw a supply and demand diagram
2. In equilibrium, how many packs of cigarettes are purchased? What is the equilibrium price? What is consumer surplus and producer surplus in equilibrium?
3. Suppose that a flat tax of $1.50 per unit is imposed on cigarettes.
a. What are the new equilibrium price and quantity?
b. Does most of that tax fall on consumers, or suppliers?
c. At the new equlibrium, will consumers spend more, less or the same as before on cigarettes?
d. How much tax revenus will the government receive?
e. Will suppliers earn more, less or the same amount?
f. What is the consumer surplus and producer surplus?
g. Calculate the dead weight loss caused by the tax.