PROBLEM #1 The following equations represent the hourly demand and supply of retail gasoline in a...

PROBLEM #1 The following equations represent the hourly demand and supply of retail gasoline in a local municipality:

Supply: Qs=500 + 75P Demand: Qd=1,105 - 150P

a. Find the equilibrium price and quantity for gasoline.

b. Find the price elasticities of demand and supply at today’s equilibrium quantity and price. Is demand elastic, inelastic, or unit elastic? Is supply elastic, inelastic, or unit elastic?

c. Suppose a new per-unit tax on gasoline is enacted to fund an environmental clean-up program. The size of the tax is $.50 per gallon of gasoline. Determine the new effective (out-of-pocket) price that consumers will now pay when this tax is in effect. Determine the price that gas stations will receive per gallon, net of the tax payment to the government. (Assume that sellers remit the tax to the government.)

d. Find the percentage burden of the tax borne by sellers and by consumers. Briefly explain why your result is consistent with the relative elasticities of demand and supply you found in part b.

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Expert Solution

Rahul Sunny answered 2 years ago

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