Question
Suppose the demand function for cigarettes is given by QD = 120 - 4 P , and the supply is given by QS = 12
Suppose the demand function for cigarettes is given by QD = 120 - 4P, and the supply is
given by QS = 12P - 200.
(a) Obtain the equilibrium quantity Q and the equilibrium price P .
(b) Determine the price elasticity of the demand at the equilibrium point. Interpret your
result.
(c) Determine the range of prices and quantities for which the demand is elastic, and the
range of prices and quantities for which the demand is inelastic.
(d) Suppose the government introduces a price floor of p = 30. Compute the new
supplied and demanded quantities and determine if the floor produces an excess
or a shortage of supply.
Now, suppose the government does not introduce any price floor and instead introduces
a specific tax of = 5 to be levied from producers.
(e) Obtain the new supply curve that accounts for the presence of the tax.
(f) Determine the new equilibrium quantity and price.
(g) Compute the government revenue from the tax.
(h) Compute the incidence (burden) for the consumers.
(i) Compute the incidence (burden) for the producers.
(j) Compute the deadweight loss produced by the tax.
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