The government is considering increasing the tax on gasoline by $3 per gallon and has asked you to determine the impact on Janet's consumer surplus. Janet spends 5% of her income on gasoline and her utility function is Cobb-Douglas.
(a) If her income is $1000 per week, what is her demand function for gasoline per week?
(b) If gasoline originally costs $2 per gallon, what is her demand for gasoline?
(c) What is the change in Janet's consumer surplus when the tax is imposed, assuming that the full tax is passes onto consumers (that is, price rises to $5).
(d) How much tax revenue does the government collect from Janet?
(e) How much is the deadweight loss?