Suppose the market demand for cigarettes is: D=10- P, and the supply of cigarettes is: S=- 2+P, where P is the price per pack of cigarettes. If the government imposes a cigarette tax of $1 per pack, the government revenue from the tax is:
A)$1.5.
B)$1.75.
C)$1.
D)$3.5.

Question

Quizplus · Accepted Answer

The equilibrium price without tax is found by setting D = S: 10 - P = -2 + P, solving gives P = 6. With a $1 tax, the new supply equation is S = -2 + (P - 1). Setting the new supply equal to demand: 10 - P = -2 + P - 1, solving gives P = 6.5. The quantity is 3.5 packs, so revenue is 3.5 packs * $1 tax = $3.5.

Suppose the Market Demand for Cigarettes Is: D=10- P, and the Supply