Question

In Merageville, if the price of gasoline is zero, daily quantity demanded is 1000 gallons. For every increase in price of 10 cents, daily quantity demanded drops by 10 gallons. At a price of zero, quantity supplied is zero, but for every increase in price of 10 cents, quantity supplied increases by 15 gallons.

Now let there be a $1.00 tax on gas, imposed on the demanders. Draw the old and new (after tax) demand curves on a diagram. Remember that the new one is just the old one dropped down by one dollar, but remember that this is the demand curve as seen by suppliers. The actual demand curve is still the same.

Calculate:

a. quantity before the tax

b. quantity after the tax

c. price before the tax

d. demanders price after the tax

e. suppliers price after the tax.

Label on the diagram, and calculate:

a. Producer surplus before the tax

b. Producer surplus after the tax

c. Consumer surplus before the tax

d. Consumer surplus after the tax

e. Government revenue from the tax

f. Consumer deadweight loss from the tax

g. Producer deadweight loss from the tax

Answer 1