Question

1. The market for cigarettes is equilibrium at p=$6 and quantity of 200 (million of packs per day). Suppose a $2/pack tax is imposed that causes equilibrium quantity to go down to 150 (million of packs per day).
2. Calculate the tax incidence i.e. share of the tax paid by consumers & producers
3. Calculate the consumer surplus before and after the tax
4. Calculate the deadweight loss of the tax
5. Calculate the tax revenue of the tax

Price/ pack $7.50 $6 $5.50

Answer 1

Aup At Equilibrium Suppy P=16, Quantity a 200 whirs. ppose a $2/ pack tax is imposed that poltity to go down to 150. causes equilibrium # P s' Par oue s . Revenue - W Buyers T Tax incidence $7.50d - f Dead weight loss $ 5.50 seller's Tax Y incidencek 150 200 Tax incidence ie share of the tax paid by consumer and producer so before tax impose Buyer pay $6 and producer get $6.per mit buen after the tax imposed Buyer be paid more ire 7.50 and producer get less ire 5.50 so total tax incidence is $20 (6) consumer surplus Before and after tax. Before tax Consumer surplus = 1 / 2 x (10-6) x 200 Fax * x 200 = $400

After tax Consumer surplus 1. X (10-1.50) x 150 СССССС 11:11 11 x 2.50x45 = 187.5 Dead weight loss of the tax TITION OWL = ar(ABC) - (7-50 S sp) ( 2vo-ISO) = 1x8x50 IDWL 2450.1 = (d) Tax Revenue of the tax Tax Revenue a anotar (adce). 150 x (7.50 -5-50) = 150x2 Tax = $300 Revenue