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This post addresses a five-cent tax on gasoline.

Suppose that the gasoline retailing industry is perfectly competitive, constant cost, and in long run equilibrium. If the government unexpectedly levies a five-cent tax on every gallon sold by gasoline retailers, depict what will the effects of the tax be in the short run on industry out puts and price? Will the price rise by the full five cents in the short run? In the long run? How would your answer change if the industry was increasing cost?

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In regards to the five-cent tax levy on every gallon of gasoline sold by gasoline retailers, it will cause a situation where the average total cost curves, the average variable cost, and the marginal cost all shift upward by five cents per gallon. All three would move in-sync with each other due to the five cent increase per gallon. From the standpoint of an effect on the short-run on the industry outputs and price, the five-cent levy will cause a reduction in the output of the gasoline. Due to the ...

Solution Summary

This is a detailed solution explaining what the effect would be of a five-cent tax levy on gasoline, assuming the gasoline retailing industry is perfectly competitive, constant cost, and in long run equilibrium. References are also provided.

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