Reference no: EM131018562

Practice Questions 3

1. Suppose demand for cigarettes in Madison is given by Qd=9-P while supply is given by Qs=0.5P. Find the equilibrium quantity and price.

a. price=$6, quantity=3
b. price=$5, quantity=4
c. price=$4, quantity=7
d. price=$9, quantity=8
e. price=$8, quantity=5

2. Consider the same cigarettes market as in question 1. Suppose that a city of Madison decides to impose a price floor of $7.

(2-1) How many cigarettes are traded in the market now?
a. 3
b. 2
c. 1
d. 4
e. 5

(2-2) We can conclude that the price floor of $7 will cause
a. A surplus of 3.5 cigarettes.
b. A surplus of 1.5 cigarettes.
c. A shortage of 3.5 cigarettes.
e. A shortage of 1.5 cigarettes.
d. The price floor would have no effect on the market.

3. Suppose demand for cigarettes in Madison is given by Qd=20-P while supply is given by Qs=0.25P.

a. Find the equilibrium quantity and price.

b. Find the consumer surplus and producer surplus, graphically and algebraically.

4. Consider the same cigarette market as in question 3. Suppose that a city of Madison decides to impose an excise tax of $5/pack on cigarette producers.

a. Write down the new supply equation as P = rather than Qs=.

b. Find the equilibrium quantity and price after the tax. Graph your results.

c. What would be the net price received by the cigarette producers?

d. Find the consumer surplus, graphically and algebraically.

e. Find the producer surplus, graphically and algebraically.

f. Find the taxes paid by consumers (consumer tax incidence), graphically and algebraically.

g. Find the taxes paid by producers (producer tax incidence), graphically and algebraically.

h. Find the tax revenue collected by a city of Madison, graphically and algebraically.

i. Find the deadweight loss of this tax policy, graphically and algebraically.

j. Suppose the smokers in Madison were more addicted to cigarettes, so their demand (assume this demand curve still passes through the equilibrium point you found in 3 (a)), is less responsive to the price change.
Would the consumers pay a higher or lower share of the total taxes collected? Illustrate with a new diagram.

k. What if the smokers are less addicted? Would the consumers pay a higher or lower share of the total taxes collected? Illustrate with a new diagram.