Suppose that the market for cigarettes in a particular town has the following su

Question

Suppose that the market for cigarettes in a particular town has the following supply and demand curves:

QS = P

QD = 50-P,

where the quantities are measured in thousands of units. Suppose that the town council needs to raise $300,000 in revenue and decides to do this by taxing cigarette suppliers (producers). What should the excise tax (t per unit of sales) be in order to raise the required amount of money in this environment?

Explanation / Answer

Let us find equilibrium Q and P for the given supply and demand lines. It occurs when Q(D) = Q(S) => 50 - P = P => 2 P = 50 => P = 25 ($) so, Q = 25 (in thousands) (using either Q(S) or Q(D) equations.) Excise tax to be raised $300000 and Q is 25000. so, 25000 t = 300000 => t = 12 ($ per unit of sales) (ANSWER)

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