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Suppose the perfectly competitive market for cigarettes in Asthmaville is given by the following supply and demand curves
QD = 500
QS = 100P-100
P*=600 Q*=500
Suppose a typical cigarette company, American Dispirits, has the following cost curves:
TC=125+q+1/20 q2
MC=1+1/10 q
a.) a.) Find q*
b.) Suppose the local government decides to place a $1.00 tax on each pack of cigarettes to stop their residents from developing health problems. What is the new price of cigarettes in the market?
c.)Who bares the larger economic incidence from the tax?
d.)Calculate the DWL from the tax.
e.)If all of the firms are the same as American Dispirits, how many firm(s) will there be in this market in equilibrium?
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