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ASSIGNMENT FOUR DUE 2.22

ASSIGNMENT FOUR DUE 2.22 - Assignment Four AGEC 505...

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Assignment Four. AGEC 505. Agricultural Market Structures. Spring 2008. Due: 11:30 AM, Friday, February 22, 2008. Turn in TYPED hard copy before class. Assignments turned in after 11:30 AM will be marked 10 percent off. This late policy will be strictly enforced . Assignments turned in after the deadline will be marked 10 percent off each day that they are late (for example, an assignment due on Friday that is turned in on Monday will be marked 40 percent off). Exceptions will be granted in advance by the instructor. ***NOTE: ALL ASSIGNMENTS MUST BE TYPED***Fifty percent off for untyped work*** READ : Chapters 9, 10 1. (7 pts) Gasoline Tax Incidence: Who Pays? The inverse demand and supply curves for gasoline are given by: P b = 5 – 0.25Q d and P s = 0.25Q s , where P is the price of gasoline in USD/gallon and Q is the quantity of gasoline in billion gallons. The government imposes a tax on gasoline: t=\$0.5/gallon. a. (1 pt) Define the terms, “specific tax,” and “ad valorem” tax,” and explain which type of tax the government has imposed on gasoline. b. (1 pt) Why did the government impose this tax? Explain carefully. c. (1 pt) Gasoline is typically considered to be characterized by an inelastic demand. (i) Explain why the demand is inelastic. (ii) Explain the implications of the inelastic demand on the tax. c. (1 pt) Calculate the market equilibrium price and quantity of gasoline, with no government intervention (t=0, P b =P s ).

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