Refer to Figure 1 Below. The figure represents demand and supply in the market f

ID: 1209531 • Letter: R

Question

Refer to Figure 1 Below. The figure represents demand and supply in the market for gasoline.

Use the diagram to answer the following questions.

a. How much is the government tax on each gallon of gasoline? (1 Mark)

b. What portion of the unit tax is paid by consumers? (2 Marks)

c. What portion of the unit tax is paid by producers? (2 Marks)

d. What is the quantity sold after the imposition of the tax? (1 Mark)

e. What is the total tax revenue collected by the government? (2 Marks)

f. What is the deadweight loss of the tax? (2 Marks)

Price (dollars per gallon) Supply, s, Tax $3.80 3.40 3.20 Demand Quantity (billions of gallons per year) 30 35

a. Government tax on each gallon of gasoline = 3.8 - 3.2 => 0.60

b. Portion of the unit tax is paid by consumers = 3.8 - 3.4 => 0.40

c. Portion of the unit tax is paid by producers = 3.4 - 3.2 => 0.20

d. Quantity sold after the imposition of the tax = 30

e. Total tax revenue collected by the government is Area of rectangle = 0.60 x 30 = > 18

f. The deadweight loss of the tax is area of triangle = 1/2 x (0.80 - 3.20) x (35-30) => 1.5

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