Question 6:

Start by considering the gasoline market in 2020. Draw a graph that shows supply and demand analysis for gasoline in this city. Label the supply curve asS₀; demand curve asD₀; the equilibrium price asP₀; and equilibrium quantity asQ₀.

Question 7:

President Obama has proposed a $2.5 trillion Infrastructure package to repair roads and bridges. The exact source of the funds is unclear at the time of construction of this exam, but some policy analysts think that at least one part of the funding will be an increase in the federal excise tax on gasoline. Suppose the size of this increase in excise tax is written ast.

• Using the original graph and equilibrium you constructed in Question 6, analyze and explain the impact of thistdollars per gallon increase in excise tax on gasoline. Which of the curve(s), if any, would shift, and why? Graphically, show the new equilibrium price and quantity (labeling itP₁andQ₁).
• At the new equilibrium, please determine how much of the tax increase was borne by gasoline consumers and how much was absorbed by gasoline sellers? Indicate the incidence of taxation for both consumers and sellers on the graph and explain.
• What will determine whether consumers or sellers will bear a higher relative burden of taxation? Please explain in detail.

Question 8:

On January 28, 2021, the U.S. Energy Information Agency (EIA) published an article with this title: "EIA expects gasoline and diesel prices to increase as U.S. economy recovers" (you do not need to read the story in order to answer this question). Essentially, the article's author predicted that the combination of generous stimulus payments and the extremely successful Covid vaccination campaign should lead to a significant increase in the number of drivers getting back on the road.

• Using the same graph you submitted for Question 7, depict and explain the impact of the change described in the article on the market for gasoline. Which of the curve(s), if any, would shift, and why? Graphically indicate the new equilibrium, labeling it asP₂andQ₂.
• What has happened to price? That is, is the newP₂greater or less than theP₀from Question 6 after the combination of the excise tax in Question 7 and the predicted significant increase in the number of drivers getting back on the road described here in Question 8? Is that change in the relationship betweenP₂andP₀unambiguous (certain)? Explain.
• What has happened to quantity? That is, is the newQ₂greater or less than theQ₀from Question 6 after the combination of the excise tax in Question 7 and the predicted significant increase in the number of drivers getting back on the road described here in Question 8? Is that change in the relationship betweenQ₂andQ₀unambiguous (certain)? Explain.