1. A state legislature is considering a $1 increase in the excise tax on packets of cigarettes . An opponent of the bill claims that this will cost a "pack -a-day " smoker an extra $365 per year. Do you agree with this statement? Explain your reasoning. If you disagree with the statement, can you think of a situation in which it would be true? If you agree with the statement, can you think of a situation in which it would be false? 2. Suppose the market for widgets has demand curve P. = 100 -Q, and supply curve Ps = 2 . (a) What is the equilibrium price and quantity? Also calculate consumer and producer (b) Suppose the government imposes a $10 excise tax on suppliers of widgets . Find the price consumers will pay, the price suppliers receive and the quantity that will be traded. [Hint: start by writing and equation that relates the price consumers pay ( Pp ), the price suppliers receive (P. ) and the $10 tax to each other ]. (c) How much revenue does the tax raise? What is the deadweight loss, if any? (d) Out of the tax revenue, what fraction would have been consumer surplus if it weren't for the tax? What fraction would have been producer surplus? (We call these fractions the "tax incidence " for consumers and producers , respectively (e) Now consider a separate market for gadgets, where demand is given by P, = 125 -1.50,, and supply is given by P. = 25+0.50 . Repeat parts (a)-(d) for the market for gadgets (f) In which market (widgets or gadgets ) is the tax incidence heavier on consumers ? Com - ment on how this relates to elasticities in the two markets. 3. (Harder ) Return to the market for widgets from the previous question . Instead of a $10 tax , suppose the government imposes a tax of St per unit (i.e. leave the tax as an unknown constant {). (a) Find expressions for the price consumers pay, the price sellers receive, and the quantity traded in terms of f. [Hint: to check your work, you could substitute in f = 10 and see whether you get the same numbers as you did in question 2.]