Question

Assume: 1. The initial equilibrium price for a gallon of gasoline is $3 per gallon and the initial equilibrium quantity traded in the market is 100 gallons per month. 2. The quantity demanded at a Price of $9.16 per gallon is just under 68 gallons per month 3. The quantity supplied at a Price of $9.16 per gallon is just over 416 gallons per month 4. Identify (by the label) the initial supply and demand curves: a. Label of Initial Equilibrium Supply Curve (e.g S1, S2, S3, etc) b. Label of Initial Equilibrium Demand Curve (e.g. D1, D2, D3, etc) 5. Assume, after we have an initial equilibrium, policy makers wish to dramatically reduce the consumption of gasoline to reduce carbon dioxide production. They intend to impose a new 30% (of the base price) per unit tax on the consumer a. Which Supply Curve is likely to result in the short run? (Identify by label) b. Which Demand Curve is likely to result in the short run? (Identify by label) c. Explain your reasons for selecting those curves. 6. Will this new tax achieve the policy makers’ goal of substantially reducing production of carbon dioxide? Note: a “substantial reduction” in this scenario means reducing gasoline consumption (and therefore CO2 production) by at least 15% from the baseline monthly gasoline consumption at any specific starting price. Support your answer using examples and information from Econ 1010. 7. Does your answer change if the policymakers tax the supplier (producer) instead of the consumer? Support your answer.

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