Problem 2 (10 points) The market for cigarettes in Mohali is perfectly competitive. The demand

for cigarettes in Mohali is given by 20QD = 300 P , where price (P) is measured in

rupees per packet of cigarette and quantity (Q ) is measured in thousands of packets. The aggregate

supply curve of cigarettes is known as P = 50 + 5QS .

(a) What is the equilibrium quantity of cigarettes consumed in this market? [2 points]

1. 8 thousands of packets

2. 10 thousands of packets

3. 12 thousands of packets

4. 15 thousands of packets

A researcher from the Max Institute of Health Care at ISB reports a strong link between

cigarettes consumption and lung cancer among children due to passive smoking, implying that

consumption of cigarettes causes a negative externality. The researcher has calculated that

the cost of the externality is |50 per packet of cigarettes. As a result, the municipality has

recommended imposing a tax of |50 per packet. Determine:

(b) What is the new equilibrium quantity of cigarettes consumed in this market? [2 points]

1. 6 thousands of packets

2. 8 thousands of packets

3. 10 thousands of packets

4. 12 thousands of packets

(c) What is the new equilibrium price paid by buyers? [2 points]

1. Rs. 100 per packet

2. Rs. 120 per packet

3. Rs. 140 per packet

4. Rs. 150 per packet

(d) What is the new equilibrium price received by sellers? [2 points]

1. Rs. 50 per packet

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Indian School of Business Managerial Economics, 2019-20

2. Rs. 70 per packet

3. Rs. 90 per packet

4. Rs. 100 per packet

(e) What is the new equilibrium tax revenue received by the city. [2 points]

1. Rs. 400000

2. Rs. 500000

3. Rs. 200000

4. Rs. 300000

I know the answer key, need detailed solution to the problem.