Answer to Question #319052 in Microeconomics for sho

Question

Suppose the Egyptian government requires cigarette smokers to pay tax on each pack of cigarettes. Draw a supply-and-demand diagram of the market for cigarettes with and without the tax. Show the price paid by consumers, the price received by producers, and the quantity of cigarettes sold before and after-tax. What is the difference between the price paid by consumers and the price received by producers? Has the quantity of cigarettes sold increased or decreased?

Answer 1

Before the imposing of tax, equilibrium price is P1 and the equilibrium quantity is Q1. The price paid by consumers is the same as the price at which producers supply the cigarette.

When the tax is imposed, the market price increases because the consumers will service the tax.The price paid by consumers is P2, while the price received by producers is more than the initial before tax.The quantity of cigarettes sold in turn declines to Q2.