Question

Assume that the current price for gasoline is $1.30 a litre, and at that price the market is in equilibrium with 144,000 litres sold per day. Now assume that the government imposes a $.10 a litre sales tax on gasoline, to be collected by gas stations and remitted to the government. After the tax, consumers pay $1.38 per litre of gasoline, and only 140,000 litres are sold per day.

a) Draw the Demand Curve, and the Old and the New Supply Curves, labelling the before tax price and the after tax price of gasoline, and the before tax and after tax quantities sold.

b) If consumers are paying $1.38 per litre, what percent of the tax (ie tax incidence) are they paying? c) How much of the $.10 tax per litre are gas stations paying? What is this tax incidence?

d) What is the total revenue received by the government from this tax? How much of this is from consumers and how much of this is from the gas stations?

e) What is the price elasticity of demand for gasoline between these the before tax and the after tax price?

f) What was the Total Revenue received by gas stations before the tax?
g) What is the Total Revenue received by gas stations after the tax?

Answer 1

- Assuming that the current Puce of gasoline is $1.30 a lite and equilibrium quantity is 144,000 lite... L Now, the govannent imposuic 0.1oa litre sales tan on gasoline to be collected by gas station and remitted by the govenment Atth the tau) leonsmines i pay $1.38 pu litre of gasoline, I and only 140,000 litres are sold pa day or This, the supply curve of gasoline will shift Llettward by the amount of tau $0.10. We can graph this situation bud.no J2 apuce toivo es vol buio ZAWS_Ouro A PBZ521) J38 Z 1130 a (@_08940.000 347.4 owl 20M2. 109,000 Dunant, wo i = Quantity. _ Hue P is the price before tau, Pl is the price afta tan, s is the initial supply curve, & is the supply (mive af to the imposition of tan Nurl b tue before tan consweis were paying $1,30 and aftu tan they pay $ 1.38. Hunce they are paying $(1.38-1130) = 0.08 higher price than before or ot 100- tanburden 0.08 x 10o=80 do of the 1. 0.) is on the con smess . Scanned with CamScanner CS

Now, Conswers are paying 0.08 highes Hoepuce than before tnice gas stations will receive as 10.1-0.08 0.0.2 lower. A of pice than before. Now before tan they were felting $ 1.30 a lite. Now they will receive $ 61030-0:02 2 1:28 a litre Hince they are receiving $0.02 lown 022 BO 2202 220.02 x 100 = 20% 0! 0 TOOD SONRA of the tan bunden is on gas station au Total revenue received by the govunment from the tau will be given from the area of O ABCD - -$ (1:381:28) 0140,000-0). a $14,000 I now consmen's contubation of this reveure is given by the areaq ABUZ Nowa ' = (1.382)130) C.149,80-0) = $ 11, 200 and gas station's contibution of this not reviure is given by the area of AZUCAR. __O P ponudbe I $ (1-30-1:28). ( 140,000-0). Cascalhned . E. $28.00 h DA bad Carth Scanner) = OC Helbed was wit