Asked by Eliza Howard on Jun 08, 2024
Verified
Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax?
A) Consumer expenditures on gasoline increase over the short run and long run.
B) Consumer expenditures on gasoline decline over the short run and increase over the long run.
C) Consumer expenditures on gasoline increase over the short run and decline over the long run.
D) Consumer expenditures on gasoline decrease over the short run and long run.
Price Elasticity
A measure of how much the quantity demanded of a good or service changes in response to a change in its price.
Federal Gasoline Tax
A tax imposed by the federal government on the sale of gasoline, primarily used to fund transportation projects.
- Analyze the impact of tax policies on consumer behavior and market outcomes.
- Determine the effects of price changes on market demand and consumer expenditure.
Verified Answer
KK
Kurtis KlingbeilJun 12, 2024
Final Answer :
C
Explanation :
The short-run price elasticity of demand for gasoline is inelastic (-0.3), meaning consumers will not significantly reduce their gasoline purchases when prices increase, leading to higher expenditures. In the long run, the demand is elastic (-1.4), meaning consumers will significantly reduce their gasoline purchases in response to price increases, leading to lower expenditures.
Learning Objectives
- Analyze the impact of tax policies on consumer behavior and market outcomes.
- Determine the effects of price changes on market demand and consumer expenditure.