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 with quantities measured in thousands of units. Suppose the town council needs to raise 300 000$ in revenue and decides to do it by taxing the cigarete market. What should the excise tax be in order to raise the required amount of money? Provide a clearly labeled graph and a final answer.

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)

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