Answer Happy

1. The market for cigarettes has the following supply and demand functions: Q$ = 8 + 3PS QP = 20 - PD where ps and PD denote the prices (in pounds) received by sellers and price paid by buyers respectively, and Qs and QP denote the quantities supplied and demanded respectively. Similarly, the market for potato crisps has the following supply and demand functions: QS 20+ ps QP = 40 - PD (a) The government is considering levying a per unit tax of £1 on cigarettes. Calculate how this tax will affect the quantity and price in the market for cigarettes. [5 marks] (b) Suppose that the government were to instead levy a £1 per unit tax on potato crisps. How much revenue would this tax generate? [5 marks] (C) Suppose the government wants to raise £1 in tax revenue and wants to do so by levying a per- unit taxes on either cigarettes or crisps (but not both), in such a way that the excess burden of taxation is minimized. Given this objective, which of the two commodities should be taxed? Calculate and compare the excess burden associated with the tax on each of the two commodities to justify your answer. [10 marks]