In the 6 months (26 weeks) before Feb 5th 2024, 10 million Australian households each bought on average 40 litres of petrol per week at an average final price (p1) of $2.00 per litre. This average final price included the excise tax (t) of $0.488 per litre and the GST of 10% which applies to petrol sales so that the final price p1 = (p0 + t) x (1 + GST), where p0 is the pre-tax price. Assume that the supply of petrol is perfectly elastic so that all taxes or subsidies are passed onto households. Assume that the household price elasticity of the demand for petrol is -0.25.

a. In the six months before Feb 5th 2024: i. How many litres of petrol in total, did the Household sector buy? ii. How much excise tax was collected by the government? iii. What was the pre-tax price of petrol? iv. What was the price of petrol after the excise tax, but before the GST? How much GST revenue from petrol sales to households was collected by the government?

On Feb 5th, 2024 the petrol excise tax was increased to $0.496 per litre for the next 6 months (26weeks).

b. In the six months after Feb 1st, 2024

i. Calculate the new final price p2 and the % change in the final price.

Use the spot formula %p = (p2 - p1 ) / p1 (rather than the cross/mid-point)

ii. Estimate the % change in the demand for petrol.

iii. Estimate the new level of the demand for petrol in litres.

iv. How much GST and petrol excise tax revenue would the government earn?