Suppose that the market demand-and-supply curves for the gasoline market are giv

Question

Suppose that the market demand-and-supply curves for the gasoline market are given below. In each case, quantity refers to millions of liters of gasoline/month: Qd is the quantity demanded; Qs is the quantity supplied; p is the price per liter (in cents).

p = 350 - 24Qd

p = 140 + 6Qs

1 What is the market equilibrium quantity and price?

2 Now suppose the government collects a sales tax of 46 cents/liter on gasoline suppliers. What is the new equilibrium quantity and price? What is the price that consumers pay now? What is the price that suppliers receive now? (Hint: derive the new supply curve first)

3  How many million dollars of tax revenue are collected by the government? (You should use the information provided in Part (b) only; tax revenue = tax/liter* liters sold) What percentage share of this tax revenue is

Explanation / Answer

At equilibrium,

350-24Q0 = 140 + 6Q0 => Q0 = 7 million liters/month

P0 = 350- 24*7 = 182 cents

Elasticity of demand = -1/24

Demand is price inelastic

PD = PS + T

At new equilibrium,

(1/24)(350 -Ps - T) = (1/6)(Ps - 140)

=> 5Ps + T = 350+560 = 910

Ps + T = 182 + 46 = 238 cents/liter

=> 4Ps = 910 - 238 = 672 => Ps = 672/4 = 168cents/liter

=> T = 238 - 168 = 70 cents/liter

PD = 238cents/liter

New equilibrium quantity = (168-140)/6 = 4.67 million liters/month

Tax revenue to government = 4.67 * 46 million cents/month = 2.15 million dollars/month

Percentage of share passed onto consumers = 70/46 = 152%

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.