midterm question

1. Equilibrium (10 - 2 per subquestion) Suppose a government decides to ban cigarettes, which leads to a black market for cigarettes. Demand for a pack of cigarettes in the black market is given by D(p) = 24 - 2p. Supply is given by S(p) = 4p a) What is the equilibrium price and quantity? b) What is the elasticity of demand at the equilibrium? c) The government finds out about the black market and destroys half the cigarettes. What is the new price and quantity at the equilibrium? Show the change in a diagram. d) Rather than destroying half the cigarettes, the government decides to tax it at 2 units per pack. What is the new equilibrium price and quantity? e) Do consumers prefer the situation in c or d? How would you quantify your