Please help me to answer these two questions: # 26 and # 27, they both are relat
ID: 1138199 • Letter: P
Question
Please help me to answer these two questions: # 26 and # 27, they both are related: Thank you in advance,,,
26. Suppose an excise tax on gasoline raises the price of gas from $3.00 per gallon to $3.50. After imposition of the tax, a consumer buys 800 gallons of gas per year. Diagram this situation. Now, the excise tax is removed and replaced with lump sum tax of $400. Using your diagram, answer the following.
(a) Under which tax is consumption of gasoline greater? Why?
(b) Under which tax is the consumer better off? Explain.
27. (a) Referring the above problem #26, diagram the individual’s demand curve for gasoline. Assume that before the tax increase, s/he consumed 900 gallons of gasoline.
(b) Assuming approximate linearity in the demand curve, show the tax revenue collected that the loss to the consumer.
Show me how to get the answers please.
Explanation / Answer
26.
0.5*800 = 400
3.5*800 = 8 *350 = 2800
Lump sum tax of $400
If the lump sum tax is on any amount; then on consumption beyond 800 gallons, the lump sum tax will remain the same. In case of the price being increased by $0.5, the expenditure is higher when the consumption is more than 800 gallons, as the tax further adds to the price.
Consumer is better off with a lump-sum tax
27.
a) If the consumption was 900 gallons of Gasoline, it decreases as the price is increased due to tax; the demand decreases along the supply curve. The demand curve shifts inwards.
b) 100*0.5 = 50
900*3 = 2700
800 * 3.5 = 35 * 80 = 350 * 8 = 2800
900*3.5 = 3150
Expected loss
3150 - 2700 = 450
Consumer decreases the consumption to 800 gallons, and, pays 2800; 100 more than the earlier expenditure