1. (25') In Country Faraway, cigarettes are forbidden, so people trade cigarettes in a black market. The cigarette demand is QD = 6 P, and the cigarette supply is 03 = 2P (a) (4') Plot the cigarette demand and supply curves. Clearly label the curves as 01 and 51. Highlight the equilibrium point as El. (Hint: you may use the following diagram) (b) (4') Find the equilibrium price P1 and quantity 01 in the black market. Show how you get the results. (Points will be taken if you only provide the numbers P1 and Q1) The government becomes aware of the black market and reinforces the police so that half of the cigarette supply would be Seized and destroyed. As a result, the new supply function iSQs=P. (c) (5') What are the new equilibrium price P2 and quantity 02? Show how you get the reSults. Plot the change by drawing a new supply curve 52 and a new equilibrium point Hg in the diagram in (a). (d) (4') How does the consumer surplus change from E1 to EZ? Are consumers better or worse off? (e) (4') Are producers better or worse off from El to 5'2? Now, suppose that the government changes the policy and legalizes cigarette dealings. Hence, cigarettes are traded in an open market. However, for every unit of cigarettes bought, the buyer must pay a tax of $3 to the government. (f) (4') Which policy do consumers prefer, destroyed black market or regularized open market? Which policy does the government prefer? Why