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QUESTION 3: 25 marks. The cigarette market can be described by the following equations: Demand: P = 10 Q (1) Supply: P = Q 4

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QUESTION 3: 25 marks. The cigarette market can be described by the following equations: Demand: P = 10 Q (1) Supply: P = Q 4 (2) where p is the price in dollars and Q is the quantity in cartons. a. What is the equilibrium price and quantity? [10 MARKS] b. Suppose the government imposes a tax of$1 to reduce cigarette consumption and also raise government revenue. What will the new equilibrium quantity be? What price will the buyer pay? What amount per carton will the seller receive? How much is the inefficiency of the tax to the economy? Illustrate your answer with the demand and supply diagram represented by equations (1) and (2) [15 marks]

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