Question 1

Consider the cigarette market of an economy. The demand function for cigarettes is given by P = 40 - 0.25Q and the supply function of cigarettes is given by P = 10 + 0.25Q, where P is the price in dollars and Q is the quantity. Solve for the equilibrium price and quantity in the cigarette market. To discourage smoking, the government imposes a tax of $10 per unit of cigarettes on the producers. Compute the consumer surplus, the producer surplus, the tax revenue, the deadweight loss (if any) and appraise the efficiency of cigarette market under this policy. Support your answers with a suitable cigarette market diagram.

Question 2

The demand and supply equations for a product are given as P = 80 - 0.5Q and P = 20 + 0.5Q, respectively, where P is the price in dollars and Q is the quantity. Solve for the market equilibrium price and quantity. If the government imposes a price ceiling at $30, calculate the quantity traded, the consumer surplus and the producer surplus in the market. Support your answers with a suitable market diagram. Appraise whether the market is efficient, compute the deadweight loss (if any) and explain whether this price ceiling benefits the consumers.

Question 3

The demand and supply functions of a product is given as P = 200 - 0.5Q and P = 100 + 0.5Q, respectively. Solve for the equilibrium price and quantity in the product market. If the product has an external benefit of $20, analyse the market and determine the social optimal quantity. Compute the deadweight loss if the market operates at its equilibrium level. Support your answers with a suitable market diagram. What can the government do to restore efficiency in the product market?

Question 4

Suppose the market for petrol in an economy is monopolised and the market supply is given by Q = 2P and the market demand is given by Q = 12 - 2P, where P is the price in dollars, Q is the quantity. Examine this market structure and solve for the equilibrium price, the equilibrium quantity, the consumer surplus, the producer surplus and the deadweight loss in the petrol market. Explain your answers with a suitable petrol market diagram.