1. (8 points)

(Similar to 9.21)

Suppose that the gasoline retailing industry is perfectly competitive, constant-cost, and in long-run equilibrium. If the government unexpectedly levies a five-cent tax on every gallon sold by gasoline retailers,

(1) Depict what will happen to the representative firm’s cost curves. (1 point)

(2) What will the effects of the tax be in the short run on industry output and price? Will the price rise by the full five cents in the short run? How about in the long run? (3 points)

(3) How would your answer change (from question (2)) if the industry was increasing-cost? (2 points)

(4) Suppose before the tax, the price is $1.00/gallon, What is the tax burden on consumers and producers? What is the deadweight loss? (Give quantitative answer for tax burden and graph answers for deadweight loss) (1 point)

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