bottles per day. After the tax is imposed, market equilibrium
adjusts to a price of $1.80 and a quantity of 1400 bottles per day.
a. Draw the supply-and-demand diagram before and after
the excise tax is imposed.
b. How much revenue from the tax does the local
government collect each day?
c. After imposition of the tax, what is the after-tax price
received by the sellers? What is the total after-tax revenue
received per day by the sellers?
d. Who bears most of the burden of this excise tax, and
why?
17. This is a challenging question intended for those students who
like math. It will help you work through the issue of tax
incidence. Consider the market for gasoline. Suppose the market
demand and supply curves are as given below. In each case,
quantity refers to millions of litres of gasoline per month; price is
the price per litre (in cents).
a. Plot the demand and supply curves on a scale diagram.
b. Compute the equilibrium price and quantity.
c. Now suppose the government imposes a tax of 14 cents
per litre. Show how this affects the market equilibrium.
What is the new “consumer price” and what is the new
“producer price”?Demand:p = 80 − 5 QD
Supply:p = 24 + 2 QS