Question 1: The demand for wheat in a country is QD = 200-2P, and supply is QS = -20 + 2P, where P is price in pounds and Q is quantity in tonnes.
(a) Find the no-trade equilibrium price and quantity in the market. What are the values of consumer and producer surplus in equilibrium?
(b) The government decides to open the domestic market to imports. The world price of wheat is £20 per tonne. In order to safeguard farming the government sets a tariff of £20 per tonne. Illustrate on a diagram and calculate the government's revenue from the tariff.
(c) Calculate the new consumer surplus and producer surplus under (b). By how much is society better off than under (a) above? Comment on the implications for the distribution of income between farmers and consumers if the tariff revenue is given to farmers as a lump sum payment.
Question 2: Discuss the following questions and substantiate your arguments with economic theory. Clearly state which assumptions you make in answering the questions. Make use of diagrams where appropriate.
(a) You are charged with maximising governmental revenues from cigarette taxation. What kind of tax rate do you propose and why? Is it possible that you would advise the government to reduce the tax rate? Why or why not?
(b) Discuss possible reasons why a government that wants to increase tax revenues would like to tax cigarettes at all. Are there other goods you think that revenue-maximising governments would like to tax? Why?
(c) How would your answer to (a) change if in addition to generating revenues, the government would also like to make people healthier?