a. In Country Faraway, cigarettes are forbidden, so people trade cigarettes in a black market. The cigarette demand is Qp=12 - P, and the cigarette supply is Q=2P
i. Find the equilibrium price and quantity in the black market. (3 marks)
ii. The government becomes aware of the black market and reinforces the police so that half of the cigarette supply would be seized and destroyed. Under this circumstance, what are the demand and supply functions? What is the new equilibrium price and quantity? Show the change by using a supply and demand diagram.(6 marks) (3 marks)
iii. How does the consumer surplus change between (a) and (b)? iv. Suppose that the government changes the policy and legalizes cigarette trade. Now cigarettes are traded in an open market. However, for every unit of cigarette purchased, the buyer has to pay tax T to the government. T is equal to the pre-tax price P. What are the demand and supply functions under this circumstance? What are the equilibrium (pre-tax) price and quantity? What is the after-tax price paid by buyers? (5 marks) v. Compare (b) and (d). Which policy do consumers prefer? Which policy government prefer? Why? (3 marks) does the