Consider a perfectly competitive local market for retail gasoline fuel in Ontario for which the demand side comprises 30,000 vehicles. Each gasoline firm in the market has an annual long-run total cost function of

TC(q) = F + 0.62q + 125,000,000 if q>0 TC(q) = 0 if q=0 where F is fixed cost and q is firm-level output in litres of gasoline retailed per year. Each firm owns a single facility (i.e. gas station), hires a manager and retains insurance, which are the only fixed factors of production. A gas station (land, building, siteworks and equipment) is a $2,000,000 capital investment that is financed by shareholders whom are able to earn an annual rate of return of 6.5% on investments elsewhere. A manager's salary and benefits are $60,000 per year and the cost of insurance is $10,000 per year. The annual demand for gasoline in the market is given by D(P) = 100,000,000 - 50,000,000P where P is the price per litre. Let Q = nq denote industry level output where n is the number of firms operating in the market. a. (4 marks) Show that F = $200,000 and determine the extent to which it is sunk. Determine whether retail gasoline production exhibits economies of scale or diseconomies of scale. Very briefly explain your answers. b. (4 marks) Show that long-run equilibrium output per firm is q* = 5,000,000 litres per year. C. (4 marks) Derive the long-run equilibrium values P*, Q" and n'. What is average weekly consumption per vehicle in the market? d. (8 marks) In Ontario, retail gasoline currently faces three taxes: a federal excise tax of $0.142 per litre (inclusive of the new carbon tax), a provincial excise tax of $0.147 per litre and an ad-valorem tax of 13% (5% federal + 8% provincial) that applies to the excise tax-included price. Under prevailing market conditions, these taxes, once combined, are equivalent to a total excise tax of roughly $0.40 per litre. Incorporating this tax into the market, derive the new long-run equilibrium values P" , Q", q' and n'. Quantify the tax revenue, deadweight loss and number of gas station closures resulting from the tax. Determine how the tax burden is shared between consumers and producers