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Suppose the local market for cigarettes is made up of the following people…Type A: QA = 20 – P Type B: QB =30 – 2P Type C: QC = 40 – 5PAnd there are 10 of Type A, 5 of Type B, and 5 of Type C.Supply...

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Suppose the local market for cigarettes is made up of the following people…Type A: QA = 20 – P Type B: QB =30 – 2P Type C: QC = 40 – 5PAnd there are 10 of Type A, 5 of Type B, and 5 of Type C.Supply is given by Qs = 47P – 94a) Given this information, find the market clearing price and quantity (P* and Q*), as well as Total Surplus.b) The government dislikes smoking, and likes tax revenue. If they wanted to increase the after-tax price to $10 per pack, what size of excise tax must be placed on sellers? How much revenue will it raise? What will be the Deadweight Loss?c) If the government was interested in maximizing tax revenue, what size tax must they impose on sellers?
Q2.An individual has a utility function U = XY2a) When income is $36, how much X and how much Y can this person afford if PX = $3 and PY = $4?b) What will be the utility maximizing bundle of X and Y?c) If the price of X rose by 10% and the price of Y fell by 10%, would this person be better off?
Answered Same Day Dec 23, 2021

Solution

Robert answered on Dec 23 2021
124 Votes
Suppose the local market for cigarettes is made up of the following people…
Type A: QA = 20 – P
Type B: QB =30 – 2P
Type C: QC = 40 – 5P
And there are 10 of Type A, 5 of Type B, and 5 of Type C.
Supply is given by Qs = 47P – 94
a) Given this information, find the market clearing price and quantity (P* and Q*), as well as Total
Surplus.
Answer:
Market demand: Q = QA+QB+QC = 20 – P + 30 – 2P + 40 – 5P = 90-8P
At equili
ium, quantity supplied equals quantity demanded i.e.
47P – 94 = 90 - 8P, implies equili
ium price (P*) = 3.3454
And equili
ium quantity (Q*) = 47*3.3454-94 = 63.2338
Consumer surplus = 0.5*(11.25-3.3454)* 63.2338 = 249.9189
Producer surplus = 0.5*(3.3454-2)* 63.2338 = 42.53738
Total surplus = consumer surplus + producer surplus = 249.9189+42.53738 = 292.4563
) The...
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