1. The equilibrium price of bananas is $4 a kilo in both city A and city B. The supply curve of bananas is the same in both cities. A price of $3 a kilo is set in both A and B. The price elasticity of demand is higher in city B. With the aid of two diagrams , explain in which city the shortage of bananas will be greatest.

2. Show the effect of placing an excise tax on cigarettes, mark clearly the price paid by consumers as Pc and the price received by producers as Py. Show the amount of tax revenue raised by the government and what proportion of this is paid by consumers and what proportion is paid by producers. Be careful to show any effects that elasticity may play in the distribution of the tax.

3. How do perfect competition and monopoly differ in terms of economic efficiency? Remember to define all your terms and use appropriate diagrams to illustrate your answer.

4. Explain what is meant by the term ‘externality' . Describe with the aid of a diagram a negative externality associated with consumption . Show theprivate and social costs or benefits in the market.