Problem Set 7(CH6).docx - Problem Set 7(CH6 KWONG Wing Kai 20513986 Problem and Applications(7,8,10 Q.7 a The effect will be either the same way whether

Problem Set 7(CH6).docx - Problem Set 7(CH6 KWONG Wing Kai...

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Problem Set 7 (CH6) KWONG Wing Kai 20513986 Problem and Applications (7,8,10) Q.7 a) The effect will be either the same way whether the tax is imposed on producers or consumers. Originally with no tax imposed on either producers or consumers, the demand curve and the supply are D 1 and S 1 respectively. If the tax is imposed on the producers, the supply curve would shift left to S 2 by the amount of the tax. The equilibrium quantity then would change to Q 2 , the price paid is P 2 , the price received is P 2 – $0.5. If the tax is imposed on consumers, the demand curve would shift left to D 2 by the amount of the tax. The magnitude of change in the demand curve is same as the change in supply curve and also in a same direction. Therefore, the equilibrium quantity, price paid, and price received would also be Q 2 , P 2 and P 2 - $0.5 respectively. b) If the demand for gasoline were more elastic, the more effective the tax will be in reducing the quantity of gasoline consumed. When there is a greater elasticity of demand, the quantity will fall ore in response to the rise in the price. From the graph below, the demand
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