## Practice question: indirect taxes

The monthly supply and demand functions for cigarettes are given as follows

Qs = -100+40P Qd = 200-20P

Where Qs and Qd are the quantities in thousands of packets and the price is the price per packet in $

a) Calculate Qs and Qd at a price of $6 per packet.

b) What is the value of the resulting surplus or shortage at this price?

c) Use the equations to calculate the equilibrium price and quantity.

d) Graph the two curves on graph paper. Identify the Q intercept for the demand curve, the P intercept for the supply curve and the equilibrium price and quantity.

e) Calculate the value of the consumer surplus and the producer surplus at the equilibrium price.

f) The government imposes an indirect tax of $2 per packet. State the new supply function, draw the new supply curve and calculate the new equilibrium price and quantity.

g) Why has the price not gone up by $2?

h) How much of the $2 tax has the consumer paid? What does this tell you about price elasticity of demand for cigarettes over this price range?

i) Calculate the new values of the consumer surplus and the producer surplus.

j) Calculate consumer expenditure and producer revenue before and after the tax.

k) Calculate the value of the tax revenue received by government and the size of the deadweight loss.

l) Shade and label the consumers' incidence of tax, producers's incidence of tax, deadweight loss