A country which does not tax cigarettes is considering the introduction of a $0.40 per pack tax. The economic advisors to the country calculate the demand and supply curves for the cigarettes as:
QS = 20,000 + 75,000P
QD = 140,000- 25,000P,
where and the country has hired you to give the following information regarding the cigarette market and the proposed tax.
1. Explain the equilibrium price and the quantity in the current environment with no tax?
2. Discuss what price and quantity would prevail after the imposition of the tax?
3. Explain what portion of the tax would be borne by buyers and sellers respectively?
4. Determine the deadweight loss from the tax and illustrate it graphically.
5. Explain what tax revenue will be generated?