Consider a mid-sized suburban locale where the market for modified electronic cigarettes, mod e-cigs, is described by the following demand and supply equations:  Q_D = 448 - 3.5P, and Q_s = 2.5P - 80 whereQ_D and Q_s are the quantity of mod e-cig demanded and supplied respectively, per month.  P is the price (in dollars) for one mod e-cig. Currently, there is no government intervention or any external factors.

 

1. Given the current market environment, what is the current market price and the quantity of mod e-cigs traded? (4 points)

Given the current market environment, the current market price is $_____and the current market quantity traded is _______mod e-cigs per month.

 

2. At the current market price, what is the value of consumers' surplus? ( 4 points)

At the current market price, the consumer surplus is $____________.

Concerned about the appeal of mod e-cigs among teenagers and the potential long lasting health problems they may incur from using these devices, the local government decides to implement an excise tax of $9.60 per unit of mod e-cig traded. After its implementation, with no additional external factors, the market adjusts. 

 

3. Given the implementation of the excise tax and the market adjustments, what is the new market outcome? (8 points)

Complete the sentence by entering one of the following phrases or a numerical value (0.00 is acceptable) in the blank space provided:

in the first blank space: a numerical value

in the second and third blank spaces:  sellers receive | buyers pay  

in the fourth and fifth blank spaces: a numerical value

With the implementation of the excise tax, the new market price is $_______ and this is the price _______ . The price ________ is $______ and the new market quantity traded is _________ . 

 

4. Given the implementation of the excise tax, what is the government revenue (tax revenue)? (3 points)

With the implementation of the excise tax, the government revenue is $_______. 

 

5. Given the implementation of the excise tax, what can you say about the burden of the tax (8 points)

Complete the sentence by entering one of the following phrases or a numerical value (0.00 is acceptable) in the blank space provided:

in the first and second blank spaces:  do | do not   

in the third and fourth blank spaces: a numerical value

in the fifth blank space: just as | more  | less   

Consumers _________, and producers ______ face a tax burden. Specifically, consumers tax burden per unit is $_______ while producers' tax burden is $_______. This implies that, compared to producers, consumers are _________ responsive to price changes. 

 

6. What can you say about the market outcome? (6 points)

Complete the sentence by entering one of the following phrases or a numerical value (0.00 is acceptable) in the blank space provided:

in the first blank space:  is | is not   

in the second blank space:  efficiency | inefficiency   

in the third blank space: a numerical value

The market outcome ______ efficient and a measure of its _______  is $______.  

 

7. Given the implementation of the excise tax, what can you say about consumer surplus? (5 points)

Complete the sentence by entering one of the following phrases or a numerical value (0.00 is acceptable) in the blank space provided:

in the first blank space:  increases to | remains the same at  | decreases to   

in the second blank space: a numerical value

As a result of the excise tax, consumers surplus ________ $________.