Question
Problem 2 (10 points) The market for cigarettes in Mohali is perfectly competitive. The demand for cigarettes in Mohali is given by 20QD = 300
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.
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