a. Consider the interaction between consumers and producers with taxes.

Suppose the market shown below is initially in equilibrium at price P1 and then the government imposes a tax on every unit sold. Under which demand curve do consumers pay a smaller share of the tax burden? Explain your answer.(8pts)

b. Consider the interaction between markets. (12pts)

Read the following statements about the oil market, demonstrate market changes on two supply and demand graphs.

Note: you are supposed to draw two graphs, one oil market, one fracking market.

Until recently, world oil prices were quite high. Then, as alternative technologies and world-wide recession drove down the demand for oil, prices fell. Saudi Arabia then relaxed its quantity controls(assume this is supply shift) and prices fell further. As a result, investment in developing alternative oil sources, such as fracking, have fallen.

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