Question

Consider the cigarettes market in an economy. The demand for cigarettes is given by the
equation P = 20 – 0.2Q and the supply of cigarettes is given by the equation P = 5 + 0.1Q,
where P is the price per packet in dollars and Q is the number of packets of cigarettes.

Assume that the cigarettes market is perfectly competitive. Solve for the market
equilibrium price and quantity of cigarettes. Compute the producer surplus and the
consumer surplus in the cigarettes market. Use a well-labeled graph to illustrate all of
the characteristics of the competitive market equilibrium you have solved for.