A Country Which Does Not Tax Cigarettes Is Considering the Introduction

question 74

Essay

A country which does not tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country estimate the supply and demand curves for cigarettes as:
Q_D = 140,000 25,000P Q_S = 20,000 + 75,000P,
where Q = daily sales in packs of cigarettes, and P = price per pack. The country has hired you to provide the following information regarding the cigarette market and the proposed tax.
a. What are the equilibrium values in the current environment with no tax?
b. What price and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by buyers and sellers respectively?
c. Calculate the deadweight loss from the tax. Could the tax be justified despite the deadweight loss? What tax revenue will be generated?

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Definitions:

Dependent Variables

In experimental and statistical research, the variable being tested and measured, which is expected to change as a result of variations in the independent variable(s).

Independent Variable

A variable in an experiment that is manipulated to observe its effect on the dependent variable.

Investigator

A person who carries out a systematic search or research, especially in order to discover new information or reach a new understanding.