The demand for wheat in a country is QD = 200 ô€€€ 2P, and supply is QS = ô€€€20 + 2P, where
P is price in pounds and Q is quantity in tonnes.
(a) Find the no-trade equilibrium price and quantity in the market. What are the values of
consumer and producer surplus in equilibrium?
(b) The government decides to open the domestic market to imports. The world price of
wheat is $20 per tonne. In order to safeguard farming the government sets a tari of
$20 per tonne. Illustrate on a diagram and calculate the government's revenue from the
tari.
(c) Calculate the new consumer surplus and producer surplus under (b). By how much is
society better o than under (a) above? Comment on the implications for the distribution
of income between farmers and consumers if the tari revenue is given to farmers as a
lump sum payment.
2. Discuss the following questions and substantiate your arguments with economic theory. Clearly
state which assumptions you make in answering the questions. Make use of diagrams where
appropriate.
(a) You are charged with maximising governmental revenues from cigarette taxation. What
kind of tax rate do you propose and why? Is it possible that you would advise the
government to reduce the tax rate? Why or why not?
(b) Discuss possible reasons why a government that wants to increase tax revenues would
like to tax cigarettes at all. Are there other goods you think that revenue-maximising
governments would like to tax? Why?
(c) How would your answer to (a) change if in addition to generating revenues, the government
would also like to make people healthier?

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