# In the 6 months (26 weeks) prior to Feb 1st 2020, 9.9 million Australian households each bought… 1 answer below »

In the 6 months (26 weeks) prior to Feb 1st 2020, 9.9 million Australian households each bought on average

38 litres of petrol per week at an average final price of \$1.420 per litre. This final price includes the excise tax

(t) of \$0.418 per litre and the GST of 10% which applies to petrol sales, so that the final price p = ( p0 + t ) x ( 1

+ GST ), where p0 is the pre-tax price.

Assume that supply of petrol is perfectly elastic, so that all taxes or subsidies are passed onto households. The

short-run (up to an including one year) elasticity of demand for litres of petrol is -0.25 and the long run

elasticity is -0.66.

On the Feb 1st 2020, the petrol excise tax will increase to \$0.423 per litre (for 6 months before it rises again

with CPI).

In calculations try to only round to 6 decimal places or preferably don’t round at all. Present all answers in

millions of litres and millions of \$. You can round to the nearest million in your final answer for each section.

a. In the six months before Feb 1st 2020

i. How many litres of petrol in total did Australian Households buy?

ii. How much excise tax was collected by the government?

(8 marks)

b. In the six months before Feb 1st 2020

i. What was the pre-tax price of petrol?

ii. What was the price of petrol after the excise tax, but before the GST? How much GST revenue

from petrol sales to households was collected by the government?

(12 marks)

c. In the six months after Feb 1st 2020 suppose that the pre-tax price of petrol stays constant and

households do not change their behaviour.

i. Calculate the final price with the new excise and the post-excise/pre-GST price.

ii. How much GST and petrol excise tax revenue would the government earn?

(10 marks)

d. In the six months after Feb 1st 2020 suppose that the pre-tax price of petrol stays constant and

households do change their behaviour.

i. Calculate the % change in the final price after new excise tax rate.

Use the spot formula %?p = ( p2 – p1 ) / p1 (rather than the cross/mid-point)

ii. Estimate the % change in the demand for petrol.

iii. Estimate the new level of the demand for petrol.

iv. How much GST and petrol excise tax revenue would the government earn?

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