Question 1 Suppose the government imposes an excise tax of $1 for every gallon of gas sold. Before the tax, the price of a gallon of gas is $2. Consider the following four after-tax scenarios. In each case, (i) use an elasticity concept to explain what must be true for this scenario to arise; (ii) determine who bears relatively more of the burden of the tax, producers or consumers; and (iii) illustrate your answer on a diagram. a) The price of gasoline paid by consumers rises to $2.75. b) The price of gasoline paid by consumers rises to $2.25. c) The price of gasoline paid by consumers rises to $3 per gallon. Assume that the demand curve is downward sloping. d) The price of consumer remains at $2 per gallon after the tax is imposed. Assume that the supply curve is upward sloping.

Question 1 Suppose the government imposes an excise tax of $1 for every gallon of gas sold. Before the tax, the price of a gallon of gas is $2. Consider the following four after-tax scenarios. In each case, (i) use an elasticity concept to explain what must be true for this scenario to arise; (ii) determine who bears relatively more of the burden of the tax, producers or consumers; and (iii) illustrate your answer on a diagram. a) The price of gasoline paid by consumers rises to $2.75. b) The price of gasoline paid by consumers rises to $2.25. c) The price of gasoline paid by consumers rises to $3 per gallon. Assume that the demand curve is downward sloping. d) The price of consumer remains at $2 per gallon after the tax is imposed. Assume that the supply curve is upward sloping.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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