Suppose government imposes a 25 per litre tax on sellers of gasoline. Before the tax, the price of gas was 50 per litre.

Illustrate the following scenarios using a separate supply and demand diagram for each. For each diagram, make sure to identify the price paid by buyers and the price received by sellers both before and after the tax.

Scenarios:

a. The price of gas paid by buyers rises to 75 per litre after the tax. The demand for gas is represented by a typical downward-sloping demand curve. What must be true about the price elasticity of supply? How much of the tax burden per litre is paid by buyers? How much is paid by sellers?

b. The price of gas paid by buyers remains at 50 per litre after the tax. The supply of gas is represented by a typical upward-sloping supply curve. What must be true about the price elasticity of demand? How much of the tax burden per litre is paid by buyers? How much is paid by sellers?

c. The price of gas paid by buyers rises to 70 per litre after the tax. Which is more price elastic -the supply curve or the demand curve? How do you know this? How much of the tax burden per litre is paid by buyers? How much is paid by sellers?