Question 12If a $10 excise tax is collected from gasoline buyers on each gallon of gasoline sold, then the demand curve for gasoline will shift __________ by $10, thereby _________ the equilibrium price.1 pointrightward; increasing.leftward; increasing.leftward; decreasing.rightward; decreasing.
Question
Question 12If a 10 excise tax is collected from gasoline buyers on each gallon of gasoline sold, then the demand curve for gasoline will shift __________ by 10, thereby _________ the equilibrium price.1 pointrightward; increasing.leftward; increasing.leftward; decreasing.rightward; decreasing.
Solution
The correct answer is "leftward; increasing."
Here's why:
An excise tax on gasoline buyers effectively increases the price of each gallon of gasoline. This makes gasoline more expensive for buyers, which decreases the quantity of gasoline they demand at each possible price. This is represented graphically as a leftward shift of the demand curve.
At the same time, the decrease in demand puts downward pressure on the price of gasoline. However, the $10 excise tax counteracts this effect by increasing the price that buyers have to pay for each gallon of gasoline. Therefore, the net effect on the equilibrium price is an increase.
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