Question

Consider the market for gasoline in Canada. Suppose the market demand and supply curves are described by the equations below. In each case, quantity refers to millions of litres of gasoline per month; price is per litre (in cents).

Demand: P = 100 – 5QD Supply: P = 44 + 2QS

1. (a) Plot the demand and supply curves on a scale diagram.

2. (b) Compute the equilibrium price and quantity.

3. (c) Suppose government imposes a tax of 20 cents per litre. Show how this affects the market

   equilibrium. What is the new “consumer price” and what is the new “producer price”?

4. (d) Compute the total revenue raised by the gasoline tax. What share of this revenue is paid

   by the consumers and what share is paid by the producers?
   [Hint: If the consumer price were unchanged from pre-tax equilibrium, we would say that consumers pay none of the tax].

Answer 1