Question

Suppose that the long-run price elasticity of demand for gasoline is -0.45. Assume that the price of gasoline is currently $4.00 per gallon, the quantity of gasoline is 140 billion gallons per year, and the federal government decides to increase the excise tax on gasoline by $1.00 per gallon. Suppose that in the long run the price of gasoline increases by $0.70 per gallon after the $1.00 excise tax is imposed billion gallons per year. (Enter a. Using the midpoint formula, after the tax is imposed, the new quantity of gasoline demanded is your response rounded to two decimal places)

In the long run, the tax reduces the consumption of gasoline by _____ billion gallons per year.

(Enter your response rounded to two decimal places.)

b. The amount of tax revenue the federal government recieves from the tax is $_____ billion.

(Enter your response rounded to two decimal places.)

c. Compared to the short-run effect of an increase in the excise tax on gasoline, the long-run effect of an increase in the excise tax has a _____ effect on the quantity demanded of gasoline; it reduces consumption of gasoline by a _____ amount; and it generates a _____ tax revenue for the federal government.

A. smaller, larger, smaller

B. larger, smaller, smaller

C. larger, larger, smaller

D. smaller, smaller, larger

Answer 1

(a) Using the midpoint formula, after the tax is imposed,the quantity of gasoline demanded is 129 billion gallons per year.

{ Mid point formula of Ed= - (∆Q/∆P)/P/Q}

# In the long run, the tax reduces the consumption of gasoline by 11 billion gallons per year.

b) Amount of tax revenue ,the federal govt receives, from the tax is 151 billion dollar

C)compared to the short run effect of an increase in the excise duty of gasoline,the long run effect if an increase in the excise duty has a smaller effect on the quantity demanded of gasoline ,it reduces consumption of gasoline by a smallet amount and it generates the larger tax revenue for the federal govt.