ECON 262
1. Excise Tax Problem:
a. Assume a per unit excise tax is levied on gasoline of $1.25 per gallon. The market clearing price before the tax is levied is $.75 per gallon and the quantity exchanged is 100 gallons per hour. The consumer will pay $1.75 after the tax is levied and the quantity exchanged will drop to 85 gallons per hour. Draw this situation on a supply and demand graph.
b. What is the total tax revenue the government will receive?
c. How much of this total will consumers pay?
d. How much of this total will producers pay?
e. How would your analysis change if the demand for gas is perfectly inelastic? Draw this situation on a graph and answer the above questions again.
2. Tariff Problem:
a. Assume that the market clearing price in the United States for sugar is $5 per pound. At that price, 50,000 pounds are sold. Draw this situation.
b. However, due to world supply and demand, the world price for sugar is $3 per pound. Add this to your graph. On your graph - show how much sugar is produced and sold domestically and how much sugar is imported.
c. At this point -- explain why consumers are better off with the world price - and relate your answer to your graph.
d. Now an import tariff of $1.50 is placed on sugar by the United States government. Show this on your graph.
e. Also show how domestic production and imports will now change. Why are consumers worse off? -- relate your answer to your graph.
f. Who is better off and why?
g. How would your analysis change if the government put a quota on sugar instead of a tariff?
3. What questions do you still have about this material?