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Please help with economic hw
3. Suppose that the Australian Government decides to increase the amount of the excise tax, such that the equilibrium price of a litre of ethanol increased by 25%
a) assume the total population aged 15 years and above is about 16.5 million. Before the price increase, we saw that they drink on average 9.95 litres of ethanol per year. How much ethanol is sold every year before the tax increase? How much ethanol is sold in the market after the tax increase? |
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As far as I am aware ethanol is an additive to petrol and Australians don't drink it in pure form. You cannot assume a linear relationship between the pretax price and the after tax price since the consumption of fuel has proven to be relatively price elastic in Australia in recent times. Increasing the price of ethanol would have undesirable impacts on agricultural industry and in Australia achieving its environmental objectives.
In general terms in an inelastic situation 160 million litres were consumed pretax and 120 million litres would be consumed post tax |
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